Ravi Chandran
One of the key challenges for many small to medium businesses is working out how to approach the bank with a loan application. Small businesses often look to finance their business needs with debt.
By: Hitesh Khan/
Your business needs to make a profit, so does a bank. When you approach a bank for financial assistance, you are asking the bank to go into business with you. You are asking the bank to consider your business plan, agree with your strategy, approve your expenditure and accept some of the risk that the business may not succeed. Banks are in the business of supporting sound and viable financial decisions, therefore every request must be considered on its own merits.
Banks have to consider risk when evaluating loan application
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The bottom line for a bank is: how much risk do we take on with this project? Will we make a profit, or are we more likely to make a loss? Each bank has its own guidelines to help it decide if a business proposition is worth pursuing or not.
Many of the applications a bank receives will not be approved, simply because the risk the bank is required to carry is too high, or because it believes the applicant can not support the risk either. Banks are regulated by the Monetary Authority of Singapore (MAS) which requires banks to make prudentially responsible lending decisions – the more risk the bank takes, the more capital it has to hold against that lending.
Banks also quantify risk according to their own lending portfolio. A bank may decline a loan application to a viable business based on the fact they are overexposed in the sector the business is in.
In a competitive market, banks will package finance products under different names and introduce a range of features to differentiate themselves. In matching a debt product and selecting the appropriate features to suit your business requirements, you need to determine the following about your business:
- What the funds are going to be required for and how long do you require the funds for– for example, to fund the purchase of inventory or to fund a building extension?
- Be realistic about the amount of funds you require and can afford.
- What level of security can you offer? How will the bank view the value of the security?
- How will the bank assess ‘risk’ for your business?
So what is the bank looking for in your loan application? Three things – information, security and experience.
The more quality information the bank has about your business, your plans and your industry, the more likely you will be successful in your loan application. The objective of preparing a loan application is to show the bank that you run a viable business and therefore providing you with a business loan is a low risk proposition.
One of the most important aspects of your loan application is to demonstrate to the bank that you can organise your thoughts and ideas in writing and can support them with financial information. Make sure that you understand all the information that is being presented in the loan application. Respect the bank’s need to ask what appear to be personal questions. Remember, they are going to be your business partner!
Bankers will be very interested in how you run your business as a profit generating exercise and your plan to generate cash flow. Healthy cash flow is the very essence of a successful small business. After all if your cash flow is poor, your business will struggle to operate efficiently and repay any loan.
Security is also crucial to the loan application. The more security you have, the better your chance of getting a loan. The security you offer will form the basis of the loan agreement. Preliminary discussions with banks will give you an idea of the kind of security they would be looking for, and the dollar value of such a security.
One best small business loan tips most people won’t give you is to not wait until you are desperate to ask for money. This is not a good foundation for a successful loan application. The bank wants to feel secure in its decision. It does not want to hear that your business needs the loan to survive; it wants to hear that your business needs the loan to grow.
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