In our first “Business Financing” series,
we presented “The
SME Guide to Business Financing:” a post on the financial options available
for SME credit, from government loans, bank loans, credit card loans or
personal savings, and peer-to-peer lending platforms.
So now you have chosen your favorite loan
option. You know you are eligible for it. You have turned in all the necessary
documents. What happens now? Specifically: how do financial institutions judge
you to be worthy of a loan?
If you have ever applied for a loan from
any financial institution for your SME, be they banks or crowdfunding
platforms, you would know that certain documents are mandatory. Requirements
generally include the NRIC of both applicant and guarantor, income tax notice
of assessment, bank statements, and of course, financial statements. Government
agencies, banks, and crowdfunding platforms also tend to require at least 30%
local Singapore shareholding.
A financial institution will then analyze
the information provided by each loan applicant and their credit history to
assess whether or not the applicant meets their criteria. This information
gathering process is also called due diligence. All data is verified, analyzed,
and summarized to paint a picture of each applicant. The evaluation process can
be broken down into: initial assessment, thorough analysis, and a final recommendation.
The initial assessment starts with a
thorough review of documents submitted by the applicant. A significant part of
the analysis is based on financial statements. Information like liquidity, the
ability to meet current obligations, working capital, turnover rate, and a
company’s net worth relative to its liabilities can all be gleaned from a
business’ financial statements.
Numbers and ratios are critical, but
authenticity and accuracy are even more important. There are cases when SMEs
don’t have audited financial statements. This is where supplementary documents such
as bank statements, invoices, and tax returns are used as part of the financial
analysis. Once all the numbers are validated, a financial institution would a
have a picture of the capacity of an applicant to repay a loan.
Financial institutions will also utilize other credit sources to inquire whether or not an applicant
has had historical payment problems. They will look at the applicant’s credit
score, pending and past litigation, payment trends, and whether the applicant
has been blacklisted by any organization. This is done to establish an
applicant’s character. The financial institution will also look into the
guarantor’s financial information.
A financial institution will then perform
another round of assessment. Loan purpose, industry norms, and the economic
situation will be considered. If all results are positive and the final
analysis approved, your loan will be disbursed.
We hope you now have a clearer view on
the credit analysis process. If your business numbers are healthy, your
facilities and staff are in good order, and your likelihood to repay debts are
high, it’s likely your application will be approved. It’s always good policy to
be honest. Never fabricate details. If you are found out, you will be
blacklisted for future loans.
Check our blog next week for another
installment of our “Business Financing” series, this time centering on the pros
and cons of banks, crowdfunding platforms, and other financial institutions.