June 1, 2020
Many factors affect working capital loan assessment. Banks are interested in how your business will grow and perform in the future, as well as usual credit assessment criteria.
An essential step in securing your chances for a loan is to be clear on the exact purpose of the loan. Whether the funding is to be used for fixed asset acquisitions, expansion plans, or to improve cash flow, be sure to be clear about it. Outlining the next steps of how you will utilize a business loan will be of tremendous help as well. It demonstrates that you’ve given your growth strategy thought and have a good sense of direction of how you’re looking to expand. There are tools available online for presenting your business plan in a concise manner, such as Enloop and Lean Canvas.
Provide your creditor with financial forecasts and how you plan to settle all outstanding loans. With that said, not all views and forecasts are foreseeable. Unforeseen events may throw you off track, affecting your plans and budget. Be sure to keep proof and documents that support changes in purchases and expenditures to convince potential creditors that changes are vital for the business.When realising your business plans, try to assume the best and worst-case scenario. Exhibit your methods for tiding through tough times and keeping your head above water when the worst case happens. Be mindful of future sales performances, and do not over-estimate. Have a look at costs incurred and do some research on possible price increases that will impact your expenses and business. Past performance records, industry studies, and other resources can help you to plan out a sustainable plan for your business.
Establishing trust and a good rapport with your potential creditor is incredibly helpful. By communicating regularly, being honest and transparent, providing frequent updates to your creditor are things you can do so to build that relationship. Covering up business issues and problems is a no-go, as these problems have the potential to surface anytime. Your banker will appreciate your honesty, and can even provide valuable advice.
The nature of your industry affects your financing chances, as banks will conduct an objective and subjective assessment of your financial position while comparing the industry businesses.A loan officer will require you to present your balance sheets and income statements for the last two or three years. If your loan quantum is considerably large, or if the purpose is more complex, such as project financing, a cash-flow projection for the period of the loan might be asked for as well. Your financial figures are one of the many factors that could delay your business loan application process.Your loan officer will review your earnings before income tax, assessing if you have more than enough income from operations to service your loans.Banks will also review your balance sheet and check on the quality of your assets. If ever you are unable to pay your loans due to insufficient earnings, banks will turn to your assets as a form of repayment.Your liabilities are also a concern. The bank will check your current debts and assess if you are capable of servicing new loans in addition to existing ones.The three widely-used metrics to evaluate your loan proposal are debt-to-equity ratio, loan-to-value ratio, and debt service coverage. Make sure your business matches the standards of these three metrics before making a trip to the bank.Banks also look at the borrower’s and guarantor’s track records for repaying debt by checking with the relevant credit bureaus such as the Credit Bureau Singapore Pte Ltd and DP Credit Bureau Pte Ltd.A credit report has important details, among them the following: records of all credit checks, credit repayment trend for the past 12 months, default records.
Amongst other considerations, banks also take into account the required cash flow to support your debt commitments and expenses. Banks look at your business’ current resources to determine if you can repay the loan.
A stronger cash-flow means the company is more likely to cater to its current commitments and manage any additional expenses. This increases reliability, which bodes well for the loan applicant.
Banks also need to determine a company’s financial health. Keep timely financial reports ready to avoid looking for records last minute when you need to compile the necessary documents for loan application. SMEs looking to expedite the financial reporting process can make use of digital accounting tools. A zero-cost option would be UOB BizSmart, as it includes digital accounting functionalities in its program.
Try to master the art of negotiation to ensure the best outcome for yourself. Be honest about what is essential and critical for your business. Negotiate for terms that will benefit you and allow you to settle loans without delay.
It also helps to apply for financial means such as the Temporary Bridging Loan Programme, where the borrower has the option to select a principal deferment option during the first year of the loan.Be sure to read the loan provisions and appeal for waivers if you think it hinders your business or your ability to repay the loan. Banks may tell you that they are standard covenants, but you can always try to ask for elimination. While dropping a loan covenant is non-negotiable in certain circumstances, relaxing it may be a possibility, if you can justify why and offer selective trade-offs.