Need to get a loan for your SME? Here’s what you need to prepare
A small business often requires funds to acquire capital assets or for operational expenses. You may need to buy new equipment to increase capacity or to replace existing machinery. You could also land a large order, which would entail hiring more workers and buying additional raw materials.
If you are running a business that has been in existence for many years and you have an adequate level or cash, you could meet these requirements from your own sources. But, in many instances, small businesses require external funding.
There are a number of banks and finance companies that specialise in extending loans to small and medium enterprises (SMEs). While each lender has its own set of eligibility criteria and credit norms, there are certain details that all of them would require about your business.
What is the best way to prepare a small business loan application? Is there any way that you can increase the probability of getting your proposal approved?
Well-prepared financial statements are a must
Your balance sheet and profit and loss account give the lender an idea of your financial position. It is likely that you will be getting these prepared by a professional accountant. But, you must understand these statements yourself and be in a position to provide answers to any queries that are put to you.
What are the sort of questions that a lender may ask? Say, your balance sheet shows that the level of debts due to your firm has increased in the last year. A lender may want to know the reason for this.
An increase in debtors may be a positive factor. Your sales could have gone up and resulted in a larger amount being due to your firm. However, a hike in debtors could also be one of the reasons for your loan application to be rejected. This could happen if the same set of debtors has not paid for an extended period. The lender may assume that you will never get this money back.
Your cash flow statement can also provide a great deal of information to the lender. The bank or finance company that you approach for a loan would like to know how much cash you are generating from operations. A cash flow statement will reveal your sources of funds and the manner in which they have been utilised.
You may be asked to furnish a personal guarantee
Many small businesses, especially those that have been recently established, can run into financial difficulties. They may lose a major customer or face declining sales volumes if a new competitor enters the market. In such a situation, the business may find it difficult to meet its financial obligations.
Banks and financial institutions are aware that some SMEs may default on instalment payments. Delays in payment may be tolerated, but if you stop paying altogether, the lender would initiate legal steps to recover its dues.
Many lenders would ask you to furnish a personal guarantee as a pre-condition for loan approval. What exactly is a personal guarantee? By signing this document you are essentially allowing the lender to seize your personal assets and sell them in the event that you default on your business loan.
Of course, the enforcement of the personal guarantee is a legal process that could take many months to complete. But losing your home and other personal assets is a real risk that you could face.
A vast majority of loans do not result in the enforcement of the personal guarantee. But this document reassures lenders that you are committed to the success of your business and have “skin in the game.”
A micro loan could be a good option
The Startup SG initiative in Singapore has an SME micro loan program that provides small businesses with the opportunity to raise funds for their operational needs. Companies can borrow up to S$100,000 from any one of a list of approved lenders under this program.
To be eligible, a business must have been in existence for at least six months. Additionally, loans under this scheme are restricted to those firms that are less than three years old.
There are several other conditions that the business must meet. At least 30% of the ownership of the firm must be with a Singaporean or a Singapore PR. This loan program is only for small firms. If your company has more than 10 employees or revenues exceeding S$1 million, it will be ineligible.
You need not provide any collateral for the loan, but a personal guarantee is necessary. The banks and financial institutions that are approved to lend under this scheme would be keen to provide finance as SPRING, an initiative of the ministry of trade and industry, shares the risk of loan default along with the lender.
You need a sound business plan
A lender would want to know how you plan to deploy the money that you are going to borrow. Funds intended for buying machinery should result in an increase in production as well as profitability. It would be necessary to demonstrate to the lender that, using the borrowed funds, you would generate extra cash. This money would then be used to repay the loan.
Some lenders may not require a formal business plan. However, it is advisable to prepare a document that provides background information about your organisation as well as other details concerning your firm.
It is important to have key data readily available. If you can demonstrate that you have a sound understanding of the industry that you operate in and knowledge about your competition, the likelihood of your loan application getting approved will increase.
Approach lenders well before your need for funds arises
Banks and financial institutions usually take about two weeks to provide a decision on your loan application. But the process could take longer than this. You may be asked to provide additional information. It is a good practice to submit your loan application several weeks before you actually need the money.
Applying for a loan when you are not in urgent need of funds has another advantage. You can use the extra time to shop around and get the best interest rates for your business.