During our webinar “Surviving COVID-19 – A CFO’s Perspective” we invited Mr Janus Lim, Managing Director of Finaqe Group, to share his advice on getting a term loan given the COVID-19 situation. He covers the key aspects of personal credit and a company’s finance that influence bank loan approval. Here are the learning points from his presentation.
What is a Term Loan?
A term loan is a loan with a specified repayment schedule that typically comes with a fixed interest rate. Loan repayment is carried out over a tenure of 1 to 5 years. Lending is an opaque process and each lender assesses a different set of criteria before approving of a loan. However, there are some general factors that influence loan assessment.
While getting a loan is often less complicated than other forms of financing such as investor fundraising, you must still adequately prepare for a loan application and seriously consider the loan terms before taking on a loan.
Loan assessment factors out of your control:
COVID-19 has impacted certain industries more than others, the current circumstances are out of the control of any one business. As a borrower you need to be aware of the factors beyond your control when applying for a loan.
Lender’s preferred industries
Some lenders have accumulated bad debt in one industry and may run on a broad policy that they do not want to increase their exposure to that specific industry. As such, regardless of your credit worthiness, you may find difficulty acquiring a loan from that bank if they do not intend to continue lending to your industry.
The person handling your loan
Each loan application is received and assigned to a banker. If your application is assigned to an inexperienced banker, he/she may not be able to adequately assess aspects of your business that mitigate risk surrounding the loan. As such, your business may be deemed too risky and fail to acquire the loan.
Getting declined influences future application
Sometimes a declined bank loan application can put you on the bank’s blacklist for 3-6 months. The reason being that processing your application carries administrative costs and the bank does not often see businesses able to significantly improve their credit worthiness within 3 months. Repeat applications while on this blacklist just lead into application declines.
Personal factors within your control:
Uphold a Positive Credit Bureau Score
Banks don’t merely look at the business’ credit reputation, individual directors’ and shareholders’ credit bureau scores (CBS) are equally, if not more important as they are the guarantors of the loan. This is a character assessment for the loan which serves as the 1st layer of assessment that your business must pass for the loan approval process to continue (instant decline if CBS fails). Credit scoring is influenced by both credit repayment ability and credit repayment habits.
Go to Credit Bureau Singapore to get your CBS report and find out how to improve your credit score before applying for a loan. The banks are one of the few parties who have access to the data of Credit Bureau Singapore and will use your CBS as a factor in loan approval.
Limit Personal Credit Exposure
Limit personal credit lines where possible. When applying for a loan, banks consider your personal credit exposure. A person with too much credit exposure increases the perceived risk of the loan regardless of credit usage.
An exaggerated example would be that of a person who has sign up for 10 credit cards in the last 6 months with over $150,000 in credit exposure. While the person might have been trying to capitalise on sign up bonuses, the fact is that this credit is available to the person regardless of usage and banks view this as added risk. Before applying for a loan, close out any unused credit lines.
Build your personal credit reputation
Pay your bills on time and do periodic checks (every 6 months) to review your credit status. Pay your bills in full and avoid closing accounts with debt remaining, your payment history is an important factor in determining your credit score. Pay down your debts and avoid continuously accumulating debt in a short span of time. Wider gaps between debt reported translates into credit worthiness.
Stay out of bankruptcy as much as possible
Declaring bankruptcy will severely affect your credit worthiness and banks usually hesitate lending to a person once listed in Singapore’s bankruptcy register. You will be unable to acquire a loan until discharged from the bankruptcy register which can take anywhere from seven to ten years. If possible, restructure the debt to avoid declaring bankruptcy.
Business factors within your control:
Avoid having returned cheques
Ensure sufficient funds in your account when making payments as it results in a returned cheque. Returned cheques are red flags for credit worthiness, any more than 2 returned cheques in the last 6 months can be enough to warrant a decline in loan application. However, do note that technical errors in writing your cheque which results in your cheque being bounced will not be deemed as a credit issue.
Maintaining proper cashflow is crucial in avoiding returned cheques. Cashflow problems are often a result of improper finance management, outsourcing your finance function is a cost-effective method of reliably managing your finances. If your company has had oversights that resulted in returned cheques, wait out the months that the error occurred and apply when the last 6 months do not reflect cashflow issues.
Ensure a healthy bank balance for your company at the last day of each month
Consider shifting expense payment to the start of the month to increase your end of month bank balance. Review existing collection terms to ensure that payments to your business come in before the end of month. Your end of the month bank balance is perceived as your monthly profit and banks will use your average end of month bank balance to gauge your loan repayment ability. Try to achieve above $10,000 in end of month bank balance to improve your business’ perceived credit worthiness.
Maintain Positive Networth for the business
Where Networth is defined as paid-up capital + retained earnings, paid-up capital being the total amount of capital funded by shareholders, and retained earnings being the profits of the company after dividend payouts. Paid-up capital equates to the level of commitment of the shareholders and helps increase the banks’ confidence in approving a loan knowing that the individual shareholders have confidence in your business. Healthy retained earnings reflect loan repayment ability and thus improve credit worthiness.
Only apply for a loan when you are prepared for it or it will needlessly extend the loan application process and might even cause you to be blacklisted by banks. Do check your credit bureau score and make structural changes to your business’ finances and your personal credit habits to improve your bank loan application success. Ensure your repayment ability is present (review the repayment ability of your company for the last 6 months) when applying for loans. If not, take some time to develop both company and individual credit worthiness before applying for loans.
“Will you definitely secure a loan with “AA” credit rating?”
While it is ideal that you ensure a good credit rating for your company and yourself, it is not a guarantee that you will certainly secure a loan. Sometimes the bank just does not want to entertain loans to an industry. A good tip if you’re self-applying for a loan would be to ask your banker if the bank is currently avoiding loans to your industry, they may tell you out of goodwill. If so, don’t try your luck and potentially get blacklisted, just go ahead and apply to another bank.
An added bonus of taking this step is that you get information on how experienced the banker is and how familiar he/she is with the operating policy of the bank. This should give you more confidence in your loan application.
“Are there any strategies in acquiring credit to improving loan application success?”
Not really. However, having credit history improves your chances of getting a loan approved as the bank can assess your credit worthiness based on your credit history. Conversely, having no credit history can ironically harm your loan application process. Ultimately, the most important factor to your loan approval is your Credit Bureau Score and working to improve it will best improve your chances of getting a loan successfully.
“Must your business be profitable to attain a loan?”
While it is helpful that your business is profitable to indicate repayment ability, not all banks need to see profitability before approving a loan. Ask your banker if you need to submit your company’s financial statements for the loan application. If the bank doesn’t require your to submit your financial statement, more likely than not they will place more significance on your Credit Bureau Score and your credit worthiness.
View the full webinar through these links.
View our blog post on the entire webinar that addresses business planning and financing strategies as we deal with the COIVD-19 crisis.
Or visit the links to the individual video presentations:
Surviving COVID-19 – A CFO’s Perspective – Paloe
Surviving COVID-19 – A CFO’s Perspective – Finaqe