Your business needs to expand to fulfil its growth ambitions for the year. You've checked out alternative funding options such as credit cards or peer-to-peer (P2P) financing, but the interest rates are simply too high to justify using those methods. So you decide to apply for a business loan, but other SME owners tell you it will take too long to process, and in the end, there's a high likelihood the bank turns you down.
This is the story of over half (52.3%) of SMEs applying for working capital loans, as surveyed by the National Chamber of Commerce and Industry of Malaysia (NCCIM) in 2022. The same survey found that loan applications of 78.6% of micro-enterprises and 63.6% of small enterprises are rejected. So as a first-time applicant, here are five tips on how to burnish your business credentials and improve your chances of getting that business loan approved:
We have explored credit history and credit scores in detail in a previous article. In summary, your personal credit history measures your ability to repay debts and responsibility in repaying them. Your credit report details: (1) the number and types of your credit accounts i.e. loans, utility bills, or credit cards, (2) how long each account has been open, (3) amounts owed, (4) amount of available credit used, (5) whether you pay bills on time, and (6) the number of recent credit inquiries (these are often triggered by bankers when you try to apply for a credit card, house, car or personal loan).
Your credit report also contains information regarding whether you have any bankruptcies, liens, collections, or judgments. Your overall credit score has an outsize impact on whether and how much money banks decide to loan you or extend credit cards to you or your business.
If your business is relatively new, say three years or less, with limited business credit history due to having not previously used a business overdraft or credit card, bankers will also look at your (as the company owner or director) personal credit history.
If you are in a partnership, Sdn Bhd or Bhd, your business partners and fellow company directors need to also have good personal credit histories, as these would affect any business loans you apply for. If you or your fellow shareholders have too many loans (even on the personal side), that can keep banks away due to your high commitments. This is because many banks use debt-to-income (DTI) ratio — the percentage of your gross monthly income that goes to paying your monthly debt payments — to determine your borrowing risk. Check with Bank Negara Malaysia's CCRIS credit report to the loan data for you and your fellow directorsis accurate over the past 12 months. You can also attempt to generate an SME credit score for your business via CTOS SME Score.
Most banks don't fund newly-established SMEs due to a lack of credit history, but there are a few exceptions/ Alliance Digital SME Express Financing is a collateral-free loan available to businesses that have been operating for at least a year.
Typically banks look at the capability of a business to repay the loan or if the business is viable. If your cash flow is in a bad state, chances are the loan may not be approved. Ideally, you should apply for a loan just ahead of when you plan to use the money. That will give you enough time to settle and use the funds appropriately.
Alternately, you can look to collateralised loans, where bankers are more likely to fund your business. In these cases, your business premise and equipment can act as collateral, so in the event you default on payments, the bank can repossess these assets.
The age of a business and its revenue generation often go hand-in-hand. Lenders frequently set minimum requirements for applicants' annual sales revenues. The Alliance Digital SME Express Financing solution is open to businesses with sales revenue of at least RM50,000.
This is why a common supporting document banks require is at least six months' worth of bank statements, so lenders can check if your revenue inflows are stable and growing to justify your ability to make timely and full repayments on schedule. If your business is young and still growing, hold off on that business loan first.
Unless you have a guaranteed big job or client in the bag, which requires you to invest to up production capacity or hire new staff, banks are unlikely to lend your business money if it has barely started.
The aforementioned business premises financing and equipment financing solutions are the business equivalents of personal home and car loans. Since the respective asset (office, factory, company machinery, or equipment) acts as collateral for these loans, these are considered secured loans. Secured loans are less risky to bankers, as they can repossess and auction off your asset should you default on your loans.
If you are just starting out with barely any business credit history, consider secured loans first to build trust with your banker. Added bonuses include lower interest rates and longer repayment periods compared to unsecured loans.
Lenders don't expect relatively new businesses to be profitable off the bat, but one way you can improve your chances of getting a business loan is by ensuring your cash flows are positive. Cash flows refer to the net amount of cash and cash equivalents being transferred in and out of a company. Cash received from your customers or via investments represents inflows, while money paid out to vendors for stock, or for utility bills and rent, represents outflows.
Of all the different company financial statements, the cash flow statement is believed to be the most intuitive of all financial statements because it follows the cash made by the business in three main ways: through operations, investments, and financing. The sum of these three segments is called net cash flow. If your inflows frequently exceed your outflows, banks are more likely to approve your business loan, confident in your ability to repay the loan.
If your revenue is rising, make sure your expenses don't rise too quickly. Expansion that leads to increased sales can often obscure higher wages due to increased word count, more expensive utility bills, or even app or software subscriptions that you need to pay on a monthly basis. To learn more about cash flow projections and steps to avoid cash flow shortfall, read our cash flow primer here.