Applying for a business loan in Singapore involves understanding how banks evaluate your application using the 5Cs of Credit: Character, Capacity, Capital, Collateral, and Conditions with information derived from Credit Bureau Singapore (CBS) reports, Notice of Assessment (NOA), company bank statements and financial statements.
Here’s a detailed look into these criteria and how you can prepare a compelling loan application.
1. Character
Character refers to the company Directors’ reputation and track record for repaying debts. This is often assessed through a combination of KYC interviews, site visits and credit history. Here’s how banks typically evaluate character:
Credit Bureau Singapore (CBS) Report
Banks will review your CBS report, which provides a detailed history of your credit behavior. A positive report with timely payments and low credit utilization enhances your character assessment, while late payments, defaults, or high credit utilization can negatively impact it.
“Secured balances in the report are indications of asset ownership, e.g. properties, motor vehicles”
Directors’ Personal NOA
The NOA, issued by the Inland Revenue Authority of Singapore (IRAS), is also crucial. It reflects the personal income and tax history of the company’s directors. Consistent and high NOAs indicate financial stability and reliability.
“Child Relief in NOA also allows banks to make an educated guess on the number of dependents and is especially useful in mitigating flight risk of foreign Directors.”
Directors’ Experience
Your experience and expertise in the industry are also crucial. Banks prefer lending to individuals who have a solid understanding of their business and industry. This includes your track record of managing similar businesses and your professional background.
“Keyman experience is only recognized through appointment of Directorship on the official Bizfile business profile from Accounting and Business Regulatory Authority (ACRA)”
2. Capacity
Capacity measures your ability to repay the loan. This involves evaluating your business’s financial health and cash flow using bank statement and financial statement. Here are key factors banks consider:
Company Bank Statements
Regular, healthy bank balances and steady inflows are positive indicators of your business’s financial stability. Through bank statements, lenders are also able to forecast your sales, operating expense as well as gain visibility of your debtors and creditors.
Financial Statements
Banks look for positive year-on-year revenue growth and strong financial metrics such as profitability.
“One key ratio for banks is a strong Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) over total annual debt servicing.”
3. Capital
Capital refers to the amount of money invested by the business owner(s). Banks want to see that you have invested your own resources into the business, indicating confidence and commitment. Here’s what they consider:
Shareholders’ Equity
Banks assess the owner’s equity, which is the owner’s stake in the business. A higher equity level suggests that the owner has a significant financial commitment and is less likely to default on the loan.
“Some banks also include the metric of net positive equity as an indication of good financial health and ability to repay.”
Business Assets
The value of business assets, including equipment, real estate, and inventory, is also considered. These assets can provide a cushion in case of financial difficulties.
4. Collateral
Collateral is any asset that the borrower pledges to secure the loan. If the borrower defaults, the bank can seize the collateral to recover the loan amount. Here’s how collateral is evaluated:
Types of Collateral
Common types of collateral include properties, equipment, inventory, and receivables. Banks prefer collateral that is easy to value and liquidate.
“For unsecured working capital loans, the only collateral is the personal guarantee offered by the Directors, which goes back to Character of the 5Cs”
Value of Collateral
The value of the collateral should match or exceed the loan amount. Banks typically appraise the collateral to determine its market value and ensure it covers the loan.
Ownership and Liens
The collateral must be owned by the borrower and free of any existing liens. Banks will check the ownership status and any claims on the collateral by looking out for any charge registered with ACRA on a company.
“Common charge sighted included fixed charge on mortgage and deposits, fixed and floating charge on receivables etc.”
5. Conditions
Conditions refer to the terms of the loan and the external factors affecting the business. Banks assess the overall economic environment and industry conditions to determine the risk level. Here are key considerations:
Loan Purpose
Banks want to know how you plan to use the loan. Clear and specific purposes, such as purchasing equipment, expanding operations, or managing working capital, are preferred.
Economic and Industry Conditions
Banks evaluate the current economic climate and industry trends. A stable or growing industry with favorable economic conditions reduces the risk for lenders.
Conclusion
Understanding the 5Cs of Credit can significantly improve your chances of securing a business loan. By focusing on building a strong credit history, maintaining healthy cash flow, investing in your business, providing valuable collateral, and being aware of economic conditions, you can present a compelling case to lenders. Preparing thoroughly and addressing these criteria can help you navigate the loan application process with confidence and success.
