In addition to the relentless pace of technology, the pandemic has accelerated it even more. Companies are now being pushed to digitalize to reach customers online or to operate remotely.
Many people now pay their bills online, check their bank balances, create business bank accounts, and apply for business loans online instead of five years ago.
In the meantime, what does this mean for you, a small business owner who is fighting to stay afloat in a recovering economy?
The likelihood of buyers having bad credit is likely to increase in an unpredictable and volatile business environment. They may be asking for additional time to pay.
A company loan is likely to be the best option for SME owners in such situations.
Asymmetric information in the financial sector can make it difficult for business owners to navigate.
Definition of information asymmetry
Asymmetric information, often known as “information failure,” refers to a situation in which one party possesses more knowledge than the other party.
Not all of this is harmful, as it results from a trained workforce where workers are specialized in their chosen fields of study or employment.
Asymmetrical information has a similar effect to many other things. If you’d want to learn more about how to do this, check out this article.
Because most bankers and financial institution employees keep their cards close to their chests, the SME owner trying to acquire a loan is likely to be disadvantaged due to asymmetric knowledge.
In the course of the loan application procedure, you may encounter asymmetrical information in the following situations:
Unclear loan eligibility criteria
Many entrepreneurs, especially those who have never applied for a loan or are doing it independently, are unaware of the factors that would help them qualify for one.
Locally established SMEs with at least two years of operation and at least 30% Singaporean or permanent resident shareholders are more likely to receive loans from banking institutions.
If your company has the necessary papers to establish its profitability, your chances of obtaining a loan will be substantially higher.
The unstated importance of the credit rating
Most financial institutions do, in the end, examine the credit ratings of corporate directors. First-time loan applicants may be unaware of this.
As opposed to your credit report, which exposes your credit history and repayment history, a credit score tells you whether or not you’re creditworthy.
Credit Bureau Singapore (CBS) assigns you a credit risk rating based on your credit history. This grade ranges from a score of 1,000 to 2,000.
In other words, the higher your credit score, the more creditworthy you will appear to the financial institution. As a credit grade, HH is the worst, and AA is the greatest.
A loan application is rejected for no specified reason.
According to an unspoken convention, most financial institutions (including banks) don’t disclose why your loan application was rejected. Or, even if they did, it might come out as incomprehensible jargon to a non-expert audience.
If candidates learn the exact reasons for their rejections, they may fabricate phone numbers and data. In the long run, this could cause a lot of problems for financial institutions.
This will leave you scratching your head until you consult with a business loan broker who can cast some light on the problem.
High barriers to entry
Soon, we’ll return to this topic. In addition to loan eligibility criteria and the lengthy loan application process, which includes a full credit history check, applicants must consider these factors before applying for a loan, especially if they need one immediately. In addition, the candidate must wait and be patient for a long time.
If you have the budget, review buying a used vehicle, you may hire a broker to assist you with some advice.
Lack of knowledge
Even if it may not appear so, there are other financing options available. It’s not just about secured loans or unsecured loans. There are several alternatives to consider, based on your main reason for needing a loan.
They could solve payroll concerns with an overdraft or credit line. Factoring or invoice financing can allow you to accept additional orders without having to wait for payment.
If you receive enough credit card payments each month, you may be eligible for a Merchant Cash Advance.
Limited pool of lenders to choose from
Most SME owners, like yourself, are tempted to apply for a loan with the bank with which they already do business.
A polite but firm rejection from the first bank will likely lead to a second application with a different institution, resulting in the same demanding application, sacrifice, and reapplication cycle.
Others, such as private lenders, peer-to-peer lenders, and family offices, may not be aware of them, and it’s not clear to them who to trust even if they were.
Unequal playing field
As a result, the bank knows everything about you and your business practices, regardless of whether it approves your application.
A few examples of the information or data they have include your company’s profile and financial performance, your company’s board of director credit ratings, your company’s last six-month bank statement, and your company’s last two-year tax bills.
Comparatively, however, you don’t know anything about their approval procedure or even why you were refused. Because of the imbalance in the connection and the asymmetry in knowledge, many SME owners are hesitant to ask for a loan.
But lenders are also affected by the same information asymmetry. Most of what they know about an SME likely came from public sources or materials provided by the SME owner.
Lenders will always question if the proprietor of a small business is hiding something. Keep records, ideally, from separate sources (e.g., sales data from POS systems, invoice information from buyers’ procurement platforms, bank records) to convey the SME’s story and authenticate the facts. This can help mitigate some of the risks.
A clearer view of the SME’s finances would help the owner’s case when seeking a loan.