Are you ready for a business loan?

At some point in your life as a business owner, you will inevitably consider a loan. Whether it is to fund a high-ticket project or to restructure your debts, or simply to tide you through a low-income period, loans can be helpful if you know how to use them. The question is, are you ready for a loan? To successfully avail a loan, you must comply with the basic requirements of a loan application and submit the necessary documentation that will prove your eligibility for a loan. Apart from this, you will also need to understand the underwriting requirements attached with your loan and assess your readiness for loan repayment. Keeping a healthy credit relationship with financial institutions and lenders can extend the life of your business. Having a healthy attitude towards loans is essential in achieving this. So, what are some of the common documentation requirements for availing a loan? What are the essential things you must understand about underwriting? And, more importantly, what are alternative sources of funding for your business should you become ineligible for loans with traditional financial institutions?

Basic requirements for business loan application

Different financial institutions (e.g., banks and lenders) have different requirements for business loans. But all these requirements seek to establish your business’ viability and your capacity to repay the loan. In general, there are two types of loans: secured and unsecured loans. Each loan type has a different set of loan requirements.

Secured and unsecured loans

A secured loan uses a property or item (machinery, inventory, securities, etc.) as a collateral or guarantee for loan repayment. Secured loans are protected loans; the lending party holds on to the title or deed of the property until the loan has been fully repaid. The collateralized property or item serves as the lender’s protection or security in case there is a default on loan repayment. In most cases, you can apply and get approved for higher loan amounts if you have collateral to offer such as your home mortgage or car. Unfortunately, some businesses do not have any property or items which they can offer as collateral. Thus, these businesses are unable to avail secured loans from banks and other traditional financial institutions for much-needed funding to finance an expansion, boost an inventory, or recover from a loss in their business. Unsecured loans, on the other hand, are exactly the opposite of secured loans. The lender takes more risk in granting you an unsecured loan without requiring any collateral or guarantee from you. The lender only uses certain guidelines, such as your capacity to pay, your character and credit record as a basis to approve your loan. In most cases, there will be a higher interest on unsecured loans. It should be noted a higher rate of interest does not reduce the risk for the financier. Lenders receive a higher compensation for the higher risk which resonates with the concept known as risk-based pricing. That said, whether you are applying for a secured or unsecured loan, you will need to comply with some basic requirements for loan processing. Some of the general requirements are listed below: 1. Last 2-3 years audited accounts or certified financial statements (if applicable) This means that your business should be operating in Singapore for the past 2-3 years. 2. Last 6 months’ bank statements Some financial institutions will require a minimum annual turnover of S$500K 3. Copy of NRIC (front and back) of owners/directors/ guarantors/ partners/sole proprietor In most cases, financial institutions will require that at least 30% of the business is owned by Singaporean or Singapore PR. 4. Latest personal income Tax Notice of Assessment of owners/directors/ guarantors/ partners/sole proprietor. Based on these documents, financial institutions will assess your eligibility for a loan. Some will allow you to borrow up to S$500K for a payment in 3-5 years; giving your business a much-needed boost. So, you’re eligible for a loan. What’s next? Just before you get too excited, it is important for you to understand the underwriting guidelines and your commitment to loan repayment. This way, you can start your relationship with a financial institution on good grounds.

What is underwriting?

In commercial banking, underwriting means assessing your worthiness for a loan and the risk that you will default on a loan and thus fail to repay the loan amount. To lower the risk on the part of the lending financial institution, they would usually charge you a periodic interest for so long as you have an unpaid loan amount. In other cases, loans will require collateral in the form of property (i.e. secured loan as mentioned earlier). If you used your house or car as loan collateral, this means that the financial institution may pull your house or car in the event you are unable to repay the loan. You must clearly understand that a loan is money borrowed and must be repaid. There are consequences to not being able to repay the loan and you must be willing to face up to these consequences. There is usually a 2 year lock-in period for loan repayments. A borrower is not allowed to repay the outstanding amount even if he has the capacity or cash flow to do so. Not all is dark and gloomy when it comes to processing a loan. You just need to exercise due diligence in reading the loan agreement and your realistic assessment of your capacity to repay. As you do your part, you will realize that establishing a healthy credit relationship will work to your business advantage in the long term. In summary, remember these two principles for assessing your capacity to repay your loan: Principle #1: Never take a higher loan than your capacity to repay. This will help you avoid defaulting on your payment and will keep your credit score healthy. Remember, the better your credit history, the better chances you have of getting approved for your desired loan amount in the future. Principle #2: Keep Your Internal Finances Healthy If as a business you have yet a credit record to show, then route all your business expenses through an operating bank account which will show your payments to staff and suppliers. Remember to pay those you owe on time. Do not inflate your Profit and Loss and your Balance Sheet. How you manage your internal finances will reflect on how you will manage paying your external creditors so make sure you do the right thing in your business.

Need a loan but you don’t have all the requirements? Help is here.

Getting a much-needed funding for your business is never easy especially if you don’t have a long business track record to show or collateral to offer. How many times have you had to turn down a customer only because you don’t have the funds to finance your inventory? How many times have you had to let go of a big project which would have been that big break for your business, because loan processing is so tedious and drains a lot of your time and energy? How many times have you been rejected for a loan even after going through the long and tedious process of loan application? One of the challenges most small and medium local enterprises face is that loan requirements from traditional financial institutions are simply beyond their reach. They haven’t been able to establish a good financial track record and they don’t have any collateral to offer. Sometimes, the loan amount could be too low for the big banks to be interested. Apart from not being able to produce the necessary documents, business owners are also challenged with the banks’ loan processing time. When you already have a job or purchase order in your hand and you became short-funded to fulfill the order, you need to be able to process a loan fast. The good news is, alternate financing such as Peer-to-peer (P2P) lending are available to help you with your business’s financial challenges. With shorter processing time, simpler requirements, and faster loan approval, alternate financing has helped many businesses take off and progress to their next growth level.