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.