The Truth About SME Financing
When you’re getting ready to finance your SME, you hear a lot of myths — some of which actually turn out to be true. If you’re a savvy SME business owner, though, you’ll be able to make your way through the financing process, avoiding all the common pitfalls (and acing our quiz in the meantime!).
1. It can be difficult for new startups to obtain financing even if they offer a great product or service.
A new business is exciting — perhaps your product reinvents the wheel, or your service is incomparable to competitors. However, regardless of the projected growth potential of your new business, banks generally do not finance newly incorporated startups with business startup loan. Most banks look for a good track record, requiring at least one to two years of operational history and attributable revenue in order approve a business loan.
For new startups still in the R&D phase, it is more advisable to source for equity financing or venture capitalists rather than debt financing from banks. For those with at least six to 12 months of operational history, however, it is possible with the right business loan broker. A business loan broker can find adequate bank financing, but these businesses should expect limited options and smaller funding amounts.
2. If a loan application is rejected from one bank, it will be rejected from other banks as well.
There are many banks providing SME loans in Singapore, and each of them has different credit criteria and risk appetite. Your application may not have satisfied the criteria for one bank, but that doesn’t mean it won’t satisfy the criteria for others. Some banks may, in fact, favor one industry over another or prefer an industry that other banks often shun.
Of course, there are exceptions. Certain adverse factors, such as pending bankruptcy or a dormant company, will often result in a declined loan application. With an experienced SME loan consultant well-versed with all banks’ credit criteria, you can match your company’s profile to suitable banks to improve approval chances.
3. Applying for a business loan at multiple banks increases the chances of approval.
Even if an SME has the time and resources to submit applications to multiple banks concurrently, it does not necessarily increase the chances of loan approval. Conversely, it might even backfire and reduce the chances of approval. Banks often conduct personal credit checks on the directors of a company during the application process; too many searches in a short period of time may reduce the credit grading of the director, which could adversely affect the likelihood of approval for subsequent applications.
Instead, consulting with a SME loan specialist can help you narrow down the banks that suit your company’s profile. This not only reduces the number of loan applications made — cutting down on time and costs — but it also increases the chances of approval. You can also do an online SME loan Singapore comparison to narrow down your options.
4. A company should seek financing before it requires funding.
Some business owners will only apply for business loans when they run into cash flow problems — but this is, in fact, the opposite of what a business owner should do. It is harder to convince banks to fund a business that is already experiencing cash flow difficulty; they are, after all, depending on your ability to pay back the loan. Banks are in the business of managing risk, not lending recklessly.
Plan ahead at least one to three months in terms of your finances. If you expect to experience growth or a slow period, begin the business loan application process as soon as possible before your financial situation deteriorates.
5. The business financing process is complicated and tedious.
Yes, banks generally request a lot of information and many documents when assessing business loan applications. And for those without the time and resources to properly collect the right documents, yes, it can be a pain with a lot of back and forth.
A lot of the time, highly-organized individuals within the company can successfully collect the right information, reducing the time spent communicating with the bank about the company’s suitability for a business loan. However, there are those times when the information collection is best left to an outside professional experienced with the process. An SME loan consultant can work with any available documents, tailoring the loan application to the bank’s criteria and streamlining the entire submission process.