There are a number of reasons why business money loan applications from SMEs may get rejected after the initial credit evaluation process. While it’s hard to say what the business loan evaluation criteria used by the banks, the private money lenders are much more open/ transparent about the process. So, let’s deep dive into some of the reasons for loan rejection and find out how to address those.
Reasons For Which Loan Applications Get Rejected
1. A Recently Incorporated Company
When it comes to approaching a money lender in Singapore, a past track record for a credit evaluation process is an absolute must. When a newly incorporated company approaches for a loan, they end up not possessing proper or complete financial statements for a thorough analysis. In fact, according to a report, around 30% of all SMEs end up failing within the first 3 years of starting a business, and this percentage shoots up to about 50% by the 5th year. So, when applying for a loan from a private organization, SMEs need to be functioning at least for about 1-3 years.
2. Loss In The Last Financial Year
Most SMEs aren’t expected to do well in the first few months of commencement of business. Yet, in order to qualify for a business loan, the SMEs are expected to have been profitable at least in the last financial year. This is a way for the financier to know whether they can trust the SME of remaining profitable or not.
3. Low Revenue In The Last Financial Year
A money loan evaluation criteria typically includes a minimum revenue requirement, which keeps varying across different financial institutes. So, SMEs are expected to have a certain annual revenue in the last financial year, to be considered for a business loan. That said, some organizations are more lenient than others to serve a wider range of SME borrowers.
4. Too Many Existing Loan
An SME is considered overleveraged when it has too many debt repayment obligations, more so when those obligations exceed its ability to repay using its normal business proceeds. Even if the SME’s guarantors or directors are willing to repay the loan from their personal funds, it’s not considered prudent for the money lender in Singapore to continue piling debt onto the business.
5. A Restricted Industry
Some financial institutions avoid lending to businesses that belong to certain industries. Why? Well, that’s because some industries have stringent evaluation criteria regardless of the state of the economy. In fact, some industries are considered just too volatile or high-risk such as oil & gas, real estate, and more. There is no way for you to find out in advance if the industry you operate in has been tagged high-risk, because such information isn’t made public, but when you approach private organizations for money loan, the relationship managers may help.
6. No Corporate Account
In SMEs, where the operator of the business also happens to be the director or the owner of the company, they often end up using personal accounts for depositing or withdrawing business proceeds. While this seems more convenient, most financial institutions don’t accept personal accounts for credit evaluation as it gets hard to differentiate which transactions are personal and which are business-related.
7. Multiple Bounced Cheques
As a general rule of thumb, there should not be more than 2 instances of bounced cheques in 6 months in the company’s bank statement. While instances such as penning the wrong recipient or address may trigger a bounced cheque, recurring bounced cheques indicate a company’s repayment behaviour or even poor cash flow management.
8. Bad Personal Credit Records
SMEs which have directors with bad personal credit records are almost always adversely affected. This is because when an SME approaches a money lender in Singapore, directors turn guarantors for the business loans. So, a history of late payments, negotiated settlements, and bankruptcy, makes financial institutions apprehensive.
9. High BTI Ratio
Under BTI or Balance to Income rules, the details of which you’d find here), individuals are not allowed to borrow more than 12 times their monthly income! The rule was introduced by MAS to lower people’s indebtedness. Sure it does not affect any SME’s loan application directly, but the directors can be negatively assessed, as they turn guarantors for the loan. So, directors will exceed the BTI ratio if they have more unsecured interest-bearing debts than their annual income.
Looking to approach a money lender in Singapore for a business loan? We’ve got your back! At Quick Loan, no business is too big or too small for us. We offer fast approval loans to kickstart your business journey. Contact or WhatsApp us at 8511 9133 to find out how you can get extra cash today!