Ravi Chandran
Banks look for certain factors before extending credit to businesses, and not knowing them is the main reason why SME business loans are denied
When business owners have a financial crunch, one of their key challenges would be in how best to approach a bank to get a SME business loan.
Always be mindful that just as 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 and you need to understand this to clinch loan quickly.
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 SME business loan application based on the fact that the business is overexposed in the sector it is in.
It doesn’t take a finance degree to know that the current economy is tough. Unemployment rates are still at an all-time high, and many companies have gone bankrupt, while others are barely hanging on by a thread. In fact, in today’s ever-changing and fluxing economic climate, business loans are about the only option small business owners have for obtaining cash to further their companies. With an efficient business loan, almost any enterprise can see immediate growth as long as they use the additional capital wisely.
One of the biggest advantage of taking out a SME business loan during tough economic times is that companies can use the additional capital it to increase their working outlay.
While companies that are looking to expand often already have enough money to become larger, taking out a loan allows them to maintain their operating cash flow, making it easier for them to cover any unexpected expenses. Thus, they are able to make payments on their loan by using the new income gained from expanding their business.
Another benefit of getting a business loan is that, if the loan is lent to a corporate entity, the loan will not usually have to be repaid by the business owner if the company fails. In the event of failure, the business is liquidated, which helps pay back part (sometimes all) of the funds borrowed. Many business owners keep this advantageous aspect in mind when borrowing money because it is only the corporation that will go bankrupt in the event of loan default, not the owner personally.
What is particularly advantageous about seeking a SME business loan in the current climate is that interest rates are unbelievably low right now.
As the liquidity of banks increases in the wake of the recession’s brunt, banks are increasing the rate at which they lend and interest rates may soon rise to compensate. A large loan taken out now or in the near future will have much lower overhead than will one taken out in two year’s time, making this the opportune time to plan expansion.
Ultimately, all business owners should evaluate their wants and needs before contacting a lender for additional capital. This allows the business owner to see which type of lender is the best fit for their company. Similarly, it is crucial that business owners take the time to read the all of the terms and conditions accompanying any business loan they are considering.
There are often early repayment penalties associated with a loan and it is important to obtain a business loan that does not incorporate these penalties, as prepaying a loan in full can save a business a large amount of money in interest.
The main thing to remember when trying for a SME business loan is to shop around for the best loan rates and always partnering with a lender who is trustworthy. If you can secure a reasonable interest rate, payments, and the ability to repay the full amount at once, getting a loan just might take your business to the next level.
Mr Paul Ho, chief mortgage officer at iCompareLoan, said: “Now pay be the best time to get more cash to to have additional capital. Business owners should talk to a trusted loan specialist to explore how they may qualify. If they own private residential property, they may also be able to get access to home equity loan. But the key is to act in a timely manner without delay as the financial scene here is rapidly changing.”
