Is it tougher for SMEs to access SME loan in Singapore? Are SMEs marginalized in the financing market?
According to our 2019 SME finance survey, close to 70% of SMEs might not be eligible to access financing.
Loan sizes for SMEs are generally too small for banks to invest resources in account servicing. However, typical retail banking lending credit models used to assess individuals' credit cards and personal loans are too simplified to apply on small businesses lending at scale.
Why do banks find SME lending a risky segment?
Commercial banks have to keep their loan books safe and profitable. Security such as collateral for loans is preferred.
Unfortunately, most SMEs are unable to put up significant collateral. There is also lack of data available on SMEs for banks to carry out full due diligence and credit analysis.
Therefore, most SME loans are granted without collateral and is backed only by director’s personal guarantee. SME lending is therefore a high risk segment for banks.
To the lender, what matters most when underwriting loans is to assess whether if the borrower will be able and willing to make timely repayments with interest without defaulting.
Banking is a conservative and heavily regulated industry. Banks and financial institutions are not charitable organizations and have various stakeholders to answer to.
It is on the onus of the borrower to prove to the banks without any doubt that the business is credit worthy and has to ability to repay.
Small business loan financing has historically and globally been a tough challenge to solve. Most SMEs are underserved in access to financing.
With the smaller loan ticket sizes for corporate loan in Singapore coupled with the higher risk banks underwrite, cost of financing for SMEs are also correspondingly higher in terms of interest rate.
Many SMEs unfortunately will still face challenges in securing business loans. We'll share some of the common reasons why SME loans are declined.
1. Applying to wrong banks
There are lots of banks and financial institutions serving the SME segment, and all of them have different credit criteria and risk appetite. You may not know which banks are a suitable fit for your business profile. So like most people, you applied to multiple banks at once.
This approach, unfortunately, often leads to a lot of wasted time and resources speaking with banks that are not suitable for the company profile. Some banks even shun certain industries whereas other banks might be welcoming to those very same industries!
Banks will never publicize their credit criteria in detail so you might face a challenge to identify which banks lending parameters fit your business profile.
2. Poor credit rating
Your personal credit rating is a strong indicator of your credit worthiness. You’ll have accessibility to more working capital funding options if you have a high personal credit grade.
If you have bad past repayment records and poor credit rating, your financing choices will certainly be a lot more restricted.
Since the director’s personal credit grading is a strong signal of credit worthiness and reliability, it is essential that you always maintain prompt payment records for your existing personal facilities.
Most banks will outright decline a SME loan application if the keyman's credit rating is too low and reflects past tardy repayment records.
3. Maxed out banker’s credit limit
You may have already have a lending relationship with your existing banker. And, as your company grows, bigger projects may necessitate more financial support. Unfortunately, most banks have a cap on financing limits, and SMEs may find that applications to their existing bankers are rejected due to the maximum limits imposed.
Also, some government financing schemes such as the Temporary Bridging Loan Programme have a max cap on funding amount across all participating financial institutions, in this case $3M. If you have already crossed the cap, even if there are other banks who have granted an approval-in-principle, you would not be able to avail of excess amount above and beyond the imposed cap.
We advise SME owners to seek out more banks to diversify credit sources should growth opportunities arise. It’s also unnecessarily risky to put all your eggs in one basket in terms of financing support.
4. Weak financial indicators
Most business owners are so immersed in the day-to-day operations of their companies that the accounting books are left under the supervision of others (or, worse, to gather dust in a filing cabinet). Banks often place heavy emphasis on a company’s financial report during the credit assessment, and weak financial figures might lead to rejections.
Some loan ratios most banks would look out for in your financial statement includes profitability, gross margins, debt servicing ratio, equity net worth and gearing ratios.
For smaller businesses who outsource their financial reporting to external accountants, it’s advisable to sit down with your accountant at least twice a year to review the financial figures of your business.
5. New and young business
Most banks prefer financing businesses that have minimum 2 years operating history, with some banks requesting for minimum 3 years.
Reason for this is due to the high failure rate of young startups. Approximately 50%-70% of small businesses fail within the first 18 months.
If you are a new start up operating less than 1 year, you could be better off managing with your existing resources first or seek other alternative funding.
Wait till your company is a little bit a lot more well established before exploring mainstream banks financing.
Although some banks could still be open to explore smallish financing amounts for new startups, it would still take a minimum of 6 to 12 months of operating history, coupled with business plans and cash flow projections to strengthen the case.
6. Smallish revenue size
Due to lack of audited financials and credit data, most banks are relying heavily on cash flow projections when it comes to unsecured SME financing.
Your business’s revenue size will be a key indicator of cash flow and debt servicing ability. In a very simplified context, the larger your revenue (incoming cash flow) and faster your receivables days (velocity of cash inflow), the better the business is deemed at servicing monthly debt dues.
Therefore, most banks credit assessment places heavy emphasis on revenue size. In general, the larger your revenue, the easier it is to qualify and obtain a business loan (subject to other credit criteria). The loan quantum offered is also very much dependent on the size of your annual revenue.
For small micro-SMEs with annual revenue of $300k, it might be tough trying to secure financing as most banks’ bare minimum requirements on annual revenue size is between $200K to $300k.
If your company has too heavy a debt burden, that could also lead to a loan decline for your SME loan applications. To be prudent in credit lending, all banks will exercise caution not to over leverage a business with excessive borrowings.
Different banks have different caps on what they consider excessive borrowings and whether a particular company is overgeared in terms of loan liabilities. So before you decide whether or not to accept the business loan top up offer from your banker, crunch your numbers again and determine if you can service the loan installments comfortably.
8. Adverse litigation
This is also one of the main killers in SME loan applications resulting in applications to be declined. If the company or business owner currently has any pending adverse litigation that are not concluded, this will definitely be detrimental. Most banks are unlikely to underwrite loan applications if there are adverse pending litigation yet to be resolved.
The exception to this is if the litigation in question is benign, example a motor accident litigation not resulting in death, where the claims amount are not high and motor insurance is expected to cover any potential costs awarded to the plaintiff.
For obvious reasons, if the company has multiple past or pending adverse litigation from financial institutions on matters related to defaults on credit facilities, it’s going to be a real long shot to qualify for any business loans.
9. Business industry restrictions/blacklist
Another common reason why loans applications are turned down by banks and financial institutions would be the industry nature of the applicant company. Some banks have a list of restricted industries that they blacklist or restrict from financing.
These would usually include objectionable industries such as money-lending firms, weapons or defense related industries, night clubs and certain segments of jems/jewelry industries.
Some banks also impose temporary short term restrictions on industries that they deem high risk or volatile at the moment in time. These would include sectors that are undergoing structural difficulties during a particular phase in time. Examples include F&B, construction and retail industries during Covid-19.
If a particular industry segment happens to constitute a disproportionate large percentage of a bank’s NPL (non-performing loans), it could also be classified as avoidance or high risk industry internally. However, this certain industry might not face any issues with another bank whom loan books might look differently.
Most banks will not publish publicly such lists of avoidance or high risk industries and are usually kept for internal purposes only. Outsiders would not be privy to such information and even if industry nature is the sole reason for loan rejection, it will normally not be revealed as such.
Industries that are cyclical and might be classified as high risk:
Persistent issues like delayed payments from main-contractors and unforeseen project extensions can be costly and could lead to default. Construction is a failure-prone business and loans to this sector are viewed as high risk.
Foreign labor constraints, manpower entry restrictions caused by Covid and increasing levies are also pertinent challenges industry players face.
The good thing is, most banks do not classify construction industry as a perpetually high-risk industry and they do extend aggressive lending to the sector during boom time as can be seen during the residential property market bull run from 2009-2013.
Oil and gas, offshore and marine
The offshore and marine industry also suffered a blow when oil prices plunges and fluctuates. According to rig builders, new orders have tapered off, affecting the sector’s earnings. A cyclical industry, climate change and the inevitable shift to greener energy sources are long term structural challenges.
The retail industry is one of the hardest hit during the mandated lockdowns during Covid period. Many retail giants exited Singapore and others had to undergo cuts in employee headcount.
Meanwhile, smaller retailers carry the added burden of paying for high lease rentals which landlords continue to jack up every year.
The popularity of online shopping and e-commerce has made it even more difficult for physical retailers to move inventory and may lead to further industry contraction of physical retailers.
10. Bad conduct of banking account
Common reason where loan applications are straight out declined; multiple returned/bounced cheques or failed Giro deductions in banking account due to insufficient funds. Banks will infer this as extremely adverse and extrapolate it as a negative reflection of the business’s credit conduct and integrity.
Also, if the operating bank account of applicant company frequently runs into arrears (negative OD balances) or dip frequently into low double or single digits, it could be inferred as cash flow pressure and volatility by the banks’ credit underwriters. This will likely result in a rejection as well.
Most banks usually request for latest 6 months operating bank statements for credit analysis when assessing a SME loan application.
11. Directors personal debt exceeds BTI (Balance To Income) ratio
Aside from the company’s gearing ratio and debt servicing ability, most banks are also concerned about the directors BTI (balance to income) ratio. This is simply a MAS mandated industry guideline on banks to cap excessive borrowing by individual borrowers.
As personal guarantors to a business loan, directors and business owners are also subjected to this industry lending guideline and banks will most likely apply the same assessment on directors when considering a business loan application.
At the time of writing, the prescribed BTI borrowing limit is: total interest bearing outstanding balances for an individual across all financial institutions should not exceed 12 times his/her monthly income. If a director/business owner should breach this prescribed limit at the point of SME loan application, application could be well rejected.
12. Partner’s credit issues
If you have partner/s in your business and are applying a business loan as joint guarantors, the banks will look at their credit score as well.
Generally, most banks might review the personal credit score of anyone whom holds more than 20% shareholdings in the applicant company. Your partner could the chances of securing a loan for the business if he/she has a poor credit score.
In this happens, you can either decide to buyout your partner and apply for the application alone. Or to include another joint guarantor with better personal credit rating.
Alternatives options if your SME business loan application is declined
Firstly, understand that the 11 possible reasons listed above are non-exhaustive and not definitive. There could be many other possible reasons why your SME business loan application could be declined.
Also, note that most banks will not be able to entertain a subsequent application within the next 6-9 months of initial application. Therefore, every application is precious and SMEs should take heed not to attempt frivolous applications and not to waste their application “bullets”.
If your application has already been declined by 1 bank, you might want to defer other applications first and try to find out, and if possible, resolve the issues that are resulting in rejections.
At this point of time, you could consider speaking to an experienced business consultants or SME loan broker who is intimately familiar with most banks’ credit criteria and could pinpoint quickly some of the underlying critical issues.
There are of course certain issues that might not be able to resolve immediately but a competent financing consultant could definitely help point you to the right direction at the very minimum. This will help to at least improve your chances of obtaining an approval from the banks in the near future.