Since the publication of this article, business lending facility types have changed, perks have improved, and interest rates have decreased, but essential credit evaluation criteria have not altered.

It may not be easy to secure your business loan application approval if any of these factors relate to your company’s circumstances.

“Why so tough?”

All SMEs confront the same problem: they can’t secure a business loan when they need it most. It is possible that banks will not tell you why they rejected your application. Here are a few things to think about.

1.Payable up capital (PUC) is too low in your company

If your business has a decent PUC, it suggests to financiers that your directors and shareholders are “with it for the long haul.” In this way, fraud risk is minimized, and directors are strongly motivated to maximize profits to repay the loan.

PUCs under $1 may indicate a lack of confidence on the part of the directors.

Investors prefer to co-share the risk with you rather than feel that they are financing your entire firm. PUC and documentation of retained earnings from earlier operation years are two ways to achieve this.

2. Recently, several lawsuits have been filed.

All legal actions are recorded in the ACRA records of both the director and the corporation. The company’s behavior’s ramifications vary depending on the type of lawsuit, but they are generally negative.

An institution using a company to recover funds is the worst possible record for a business. It decreases your trust in your ability to repay new loans.

However, most traffic actions have little impact unless there is an unpaid claim that could be worth thousands of dollars. Any judgment against (defendant) corporation could have a substantial effect on its financials.

Numerous financial institutions are unwilling to take on the risk of a potential bankruptcy for most business loans.

3. There are signs that your organization is in a “high-risk” industry.

I see. You’re not specifically in the marine or construction industries, then, right? Unfortunately, banks rely their exposure calculations on the SSIC code’s list of industries.

This means that if your business falls into this high-risk group, it is likely to be evaluated with other businesses in the same industry, i.e., Civil Engineering may not be in the construction industry per se, yet still considered part of the construction industry; therefore, assessed together.

4. Too many returned cheques

Cheques that bounce for various reasons, including inadequate amounts, are the ones we’re talking about here. Returns of more than one check a month within the last six months suggest that the company is likely experiencing cash flow problems and may not repay a new loan shortly.

Inadequate cash isn’t the only reason for this. Inferior bookkeeping methods within the organization are also to blame.

Uncertainty about a customer’s repayment capabilities makes financial organizations reluctant to provide loans. As a rule, they prefer to fund the company’s standard operating or expansion needs rather than use it as a bridge or tide it over during difficult times.

5.Debt-Servicing Coverage (DSC) Ratio is too low

Calculated annually, the DSC ratio tells us how much profit a corporation makes compared to its loan repayment commitments. Having a higher DSC means that a firm is more likely to be in a position to repay its loans with earnings, increasing your chances of obtaining financing.

For example, Due to existing loans, your current DSC is 1.5 times higher than average. This means that if this new loan request is approved, your DSC ratio will drop to 0.80x, indicating that your annual profits are no longer sufficient to cover the full repayment of the debt.

6. You’ve got bad credit.

Lenders may turn down unsuccessful businesses if their credit reports show missing payments and reckless borrowing—or no borrowing history at all. Most traditional lenders usually require credit scores of 620 or above. With a less-than-stellar credit history, you may be in for some rejection.

The good news is that you may begin restoring your credit right away.

7. Your business has no credit history.

Contrary to commercial credit, which is more challenging to develop, many people begin building their personal credit records long before they consider starting a business. However, traditional lenders may require an excellent corporate credit score before approving your loan application, even if your personal credit score is perfect.

Start building business credit by following these steps. Separating your personal and business finances is the first and most crucial step. Your business’s credit will improve if you open a business checking account, formalize its legal structure (S Corp, LLC, etc.), and obtain a business credit card.

 

Formula below.

DSC Ratio = Net Operating Income / Debt Service

Net Operating Income = Net Income + Amortization and Depreciation + Interest Expense + Other Non-cash Items

Debt Service = Principal Repayment + Interest Payments + Lease Payments

Published On: September 28th, 2021 / Categories: Uncategorized /