Starting a business is no easy feat. It involves a lot of planning and a never-ending to-do list. Most experienced entrepreneurs agree that the biggest difficulty business starters face is having insufficient capital. Having inadequate funding or working capital is one of the main reasons businesses fail.

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 financial institutions.

Remember: Preparation is key!

GIF of Hillary Clinton talking about preparation
(GIF: Giphy.com)

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 institutions.

Banks in Singapore will carefully evaluate all applications before approving of a loan. This means preparation 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.

GIF of woman saying "Let's do this."
(GIF: Giphy.com)

1. Present a Comprehensive Business Plan

The proposal should consist of a well-explained executive summary: give a good overview of what your business does, the product(s) you are selling or service(s) you are providing, followed by your marketing strategies (i.e. how you plan to promote your brand), and how all of this will generate sales and profits.

You should also document the opportunities your business can take advantage of and include a clear plan with numerical data detailing 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.

You may want to include a PESTLE analysis, Porter’s five forces framework as well as a SWOT analysis. Elaborate on the business’s competitive advantage and how it differentiates itself from competitors.

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

2. Ensure Your Personal Finances Are in Order

Although you may be taking a business loan for your startup or SME, banks will still look into your personal finance. They will look through your debt records, loans, mortgages and your credit score.

GIF of Sailormoon breaking piggybank to count coins
(GIF: Giphy.com)

For the uninitiated, 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 chances that 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

Explaining the relevant experience and knowledge you have in the field helps to improve the image of your company. Having experienced leaders or managers will bring confidence to the banks (and investors) that the company will do well.

Indicate that you have the required skills needed for the business. As a plus point, include the information and skills of your entire management team to beef up your company’s profile.

Man insisting he has people skills GIF
(GIF: Giphy.com)

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, even if you’ve prepared everything to the best of your ability, it is not a 100% guarantee that banks will approve of your loan. Below are a few reasons banks may reject your loan application.

Reasons banks reject loan applications

1. Bad Credit

Banks will turn away loan applicants with bad credit. As mentioned above, the first thing lenders review is the credit history of potential borrowers. Having bad credit suggests that you have been unable to make loan payments on time or that you have poor financial management. Banks believe that it is riskier to provide loans to such individuals.

However, there is a way to salvage the situation. One can improve their credit score by paying their future loans on time and getting all of their debt 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.

2. 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 collateral from their borrowers in exchange for funds. Most businesses that are just starting often do not have equipment or real estate to be used for the loan.

3. Youth of Business

GIF of man saying youths
(GIF: Giphy.com)

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

4. Poor Cash Flow

Before approval, banks will assess the business to determine if the company is able to pay 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.

No money GIF
(GIF: Giphy.com)

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 results in a weak cash flow.

5. Business Environment

Sometimes banks do not approve business loans due to what they perceive to be bad business conditions. Should the bank analyst see that conditions are risky, they will deem it harder for the startup to generate revenue and profits for loan repayment.

If risks are high, 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 profits.

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 you can consider. Crowdfunding and P2P lending are some great alternatives accessible over the internet that you could also consider.


moneykinetics-logo-1This article first appeared as Business Loans for Startups and SMEs – Preparing Your Loan Application in 2018 on Money Kinetics: Singapore’s definitive guide to financial literacy. Money Kinetics helps Singaporeans compare and evaluate loans, deals, cards and guide them to make their money work for them.

The article has been edited for concision and style with the permission of Money Kinetics.