It’s never a good feeling, seeing a letter that begins with, “We regret to inform you…” or answering a phone call to hear, “I’m sorry, but your SME loan application has been denied.” Securing an SME loan in Singapore for your business can be nerve-wracking enough, so finding out your application has been denied is a morale letdown (and a financial one, too.)
According to Linkflow Capital’s 2019 SME finance survey, close to 70% of SMEs might not be eligible to access financing.
But hindsight is 20/20, as they say, so it’s best to take a look at just what are some possible reasons your SME business loan application was declined by the banks.
1. Applying to multiple banks
There are lots of different banks and financial institutions serving the SME financing segment, and all of them have different credit criteria and risk appetite — and you may not have been able to tell which banks were right for you. So, like a lot of people, you went to every bank you could find.
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 high risk industries, like food & beverage or construction, whereas other banks might be welcoming to those very same industries!
Also, multiple concurrent credit searches on you by various financiers will also affect your personal credit rating and possibly pull down your credit score.
2. I only paid attention to my company’s credit standing
Did you assume that your business financing applications would be assessed solely on your company’s credit standing? You are in for a surprise: most banks actually assess the business owner’s personal credit rating when processing a SME loan application.
A tardy repayment record on your personal credit cards may have been detrimental to your business loan application, no matter how stellar your company’s financial performance looked.
It is therefore critical as a business owner for you to protect your personal credit score and ensure your personal credit facilities are consistently paid promptly when due.
3. I didn’t check my banker’s lending limit
You may have already had 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 $5M. 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 would advise SME owners to seek out few other 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 financiers. We’ve all heard of the old adage: When it shines, the banks will offer you an umbrella, when it rains, they’ll take it back.
4. I didn’t really understand my financials
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 poor financial figures usually lead to a number of rejections.
Some key figures 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. Business is newly incorporated and young
This is also a common reason why banks are not able to extend financing. Most banks prefer financing businesses that have at least a 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.
New-ish startups would therefore find it quite challenging to obtain any form of business financing in the initial phase. 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. 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.
7. Over-leveraged with existing debts
If your company has too much existing loans with current bankers, that could also lead to a loan rejection 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 against the borrower
This is also one of the main killers in SME loan applications resulting in rejections. If the company or business owner currently has any pending adverse litigation that are un-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 phase in time such as the marine and shipping industry during 2016-2018.
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.
10. Bad conduct of banking account
One more common reason where loan applications are straight out rejected; multiple returned/bounced cheques or failed Giro deductions in banking account due to insufficient funds. Banks will infer this as an extremely adverse credit event 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.
Alternatives options if your SME business loan application is rejected
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 by the banks.
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 rejected 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.