Starting a business is no easy feat. It involves a lot of planning and a never-ending to-do list. Most experienced entrepreneurs would agree that the biggest difficulty business starters face is having insufficient capital. Having inadequate funding or working capital is one of the main reasons for a business to fail. Hence, before you embark on your business venture, it is helpful to understand the entire loan application process for your funding and the necessary documents required by the financial institutions.

Remember: Preparation Is Key

Preparing Your Loan Application

As the saying goes, “If you fail to plan, you plan to fail”. Businesses in Singapore that are applying for loans must be well-prepared with their company’s information and ideas as they approach financial institutes. Banks in Singapore will carefully evaluate all businesses before approving of a loan. Hence, being well-prepared is extremely important especially for startups or SMEs who need to convince banks that their business will run smoothly and that they will be able to repay the loan.

1. Present a Detailed Business Plan

Include a comprehensive business plan in your loan application. The proposal should consist of a well-explained executive summary: giving a good overview of what your business does, the products that you are selling or the services that you are providing, followed by your marketing strategies about how you plan to promote your brand, how it will generate sales and profits. It should also explain the opportunities that your business can take advantage of and a clear plan with numerical data of how your business intends to use the loan. The proposal should also include a thorough analysis of the business environment, threat or power of competitors. Some business proposals may include a PESTLE, Porter’s five forces as well as a SWOT analysis. Elaborate on the business’s competitive advantage and how it differentiates itself from competitors.

All these help to increase the success rate of your loan application. Your objective is to convince the banks that your business has a clear direction, a detailed strategy that will bring in revenue and that you will be able to repay your loan.

2. Personal Finance

Although you may be taking a business loan for your startup or your SME, banks will still look into your personal finance. They will look through your debt records, loans, mortgages and your credit score. Credit scores are basically numerical representations of a person’s trustworthiness in debt repayment and commonly used by lenders. Having a good credit score will increase the approval chances of your loan. Likewise, a poor credit score reflects badly on your repayment ability. Lenders are usually more interested in borrowers who have taken loans and made repayments on time with strong credit scores.

3. State Your Skills And Expertise

Explain your relevant experience and knowledge in the field to help improve the image of your company. Having experienced leaders or managers will bring confidence to the banks or even investors that the company will do well. Indicate that you have the required skills needed for the business. It will be a plus to include the information and skills of your entire management team to beef up your company’s profile.

4. Choose a Bank

Many banks in Singapore offer business loans. Make a list of all the banks that you are interested in and then find out their requirements for the loans. Certain banks may have a lower maximum loan limit or stricter requirements that your business may not qualify for. If you have a good credit score, you can consider taking a business loan from a bank that you are already with. Chances of an approval might be higher.

However, it is not a 100% guarantee that banks will approve of your loan. Below are a few reasons as to why banks may reject your loan application.

Bad Credit: Banks will turn away loan applicants with bad credit. Credit history of borrowers is the first thing that lenders will review. People with bad credit suggests that they have been unable to make loan payments on time or that they have poor financial management. This implies a higher risk when providing a loan to them. However, there is a way to salvage the situation. One can improve their credit scores by paying their loans on time and getting all of their debts under control. Also, try to limit the number of credit facilities you have across different financial institutions and avoid having accounts that you do not need.

Lack Of Collateral: Most startups and small businesses are unable to provide banks with the necessary collateral for the loan. Banks work by providing secured loans. This means that they take in collaterals from their borrowers in exchange for funds. Most businesses that are just starting often do not have equipment or real estates to be used for the loan.

Age Of Business: Businesses that are still very young may not be able to attain a loan from the banks. Banks may require you to be in the business for several months to one or two years before providing the loan with monthly repayments.

Poor Cash Flow: Before approval, banks will assess the business to determine if the company is able to pay for their payroll, inventory, rent and other monthly expenses. The problem that most startups face is that they have to pay their initial revenue to their suppliers first before paying themselves. This increases the risk of them being unable to make timely debt repayments. Sometimes, due to the nature of the business or product, the profit doesn’t come in until a much later date. This causes weak cash flow.

Business Environment: Sometimes banks will not approve the business loan due to the business situations. Should the bank analyst see that the conditions are risky, it would mean that it will be harder to generate revenue and profits for loan repayment. Considering the risks, even businesses with the best and most detailed proposals may be rejected. For example, if you wish to expand your courier delivery services in Singapore but there is a sudden rise in fuel costs, banks may not approve of the loan for fear of low or no profits.

More importantly, remember to prepare a detailed and well-planned business proposal to improve your chances of getting a loan from the bank. Rather than just stating that you need $250,000 for your business, list out your business strategy, the opportunities, marketing strategies, costs that lead up to a sum of $250,000 and how it will generate revenue for loan repayment.

Nonetheless, it always pays to have a plan B. Should the bank loan for your business fail to go through, there are always other sources of funding. With technology and communication today, new platforms such as Crowdfunding, P2P Funding and more are also great alternatives for you to receive the necessary funding.