What are the Difficulties in Finding a Loan for SME in Singapore?

It’s almost impossible these days to keep a small business running with money from your own pocket. Whether it is a purchase inventory, hiring new employees, or opening additional locations, every kind of expansion involves extra working capital.

The fact that it is becoming increasingly difficult for small business owners to secure financing through a bank makes it even more difficult. There are a lot of reasons why banks are declining loan requests from small business entities.

Here are some of the possible reasons why it is difficult to find a loan for SME in Singapore.

Lack of Consistent Cash Flow 

Banks tend to favor SMEs with steady revenue streams and consistent cash flow coming every month. SMEs that can not express this consistency are denied loans much more often than not.

Insufficient Collateral 

In the case of SMEs, the lack of sufficient collateral excludes them from obtaining financing, as loan applications usually involve a request for an effective piece of collateral to complete the transaction and receive financing. This is not a problem for large companies that own property or other large ticket assets, but it can be an overwhelming obstacle for SMEs.

Debt-to-income Ratio

Banks are cautious of lending to companies that have an outstanding debt to other lenders. In many cases, they will not even consider lending to a company that has already been financed. Since many SME owners are seeking credit from multiple sources, especially during the start-up phase, this may be a major strike against them when trying to apply for a loan or cash advance from a commercial bank.

Customer Concentrations

Banks are often skeptical about businesses that report a significant portion of their sales to only a select number of clients. Lenders, in general, like to see the diversity of the business clientele as opposed to the same customers. For instance, a local pub or restaurant, which relies mainly on its “regulars” for steady income, may pose a perception issue with traditional banks.

Insufficient Credit

In the midst of a major recession, banks have expanded their credit scores, but many business owners of smaller firms have credit scores that are still suffering the effects of the financial crisis. While in these difficult moments of the CoVid-19 outbreak, it is still very important to maintain a good personal credit score.

Personal Guarantees 

Personal guarantees from business owners are qualifications from banks, but this also makes the owner personally responsible for paying back the loan. That is a shaky position for those struggling to remain on top of their expenditures every month.

Insufficient Operating History

Banks give favorable treatment to companies with long and significant track records. After all, they do not want to fund a business that has been in operation for a while but has not maintained a certain amount of credibility and success. Banks require a solid track record of generating income over a specific period of time in order to receive funding. Without this solid operating history, the SME is likely to be rejected for a loan.

Economic Concerns 

Not intended, but the banks are always concerned with their own interests. They will simply not give loans to a business if they feel that the current market conditions are unfavorable for having the money back in time. It places an unfair burden on SMEs to retain sales and hold costs down when the economy takes a dramatic turn.

Insufficient Management Team 

Banks will reject a loan for SME that do not have strong top-level leadership with a significant chain of command, as this may raise concerns about the organizational competence and long-term success of a business.

Sunset Industry 

Operating an SME in an industry that a bank considers to be “risk-adverse” or declining will complicate the chances of obtaining financing from a traditional bank.

What do you think?

Written by Michael Curry

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