Help is available if you’ve ever struggled to understand the language used by banks when examining your business loan application.
With the help of two professionals — Mr. Victor Chang, a Sales Manager from CIMB Bank Singapore’s Commercial Banking business, and a Relationship Manager from Citibank — we’ve decoded some of these phrases for you.
Mr. Chang (CIMB): This occurs when a corporation has an excessive number of existing liabilities (such as loans) with financial institutions (FIs). Most financial institutions would reduce credit/default risk by lending cautiously to a company with high liabilities.
As a result, if your company is overly reliant on loans, you should calculate a reasonable monthly repayment amount.
Citibank: Debt Servicing Ratio (DSR) stands for Debt Servicing Ratio. Some banks refer to it as DRR (Debt Repayment Ratio) or DSCR (Debt Service Coverage Ratio) (Debt Servicing Current Ratio).
This is measured differently by different financial institutions, but it is essentially the company’s cash intake minus its usual debt servicing. This can be determined monthly (using bank statements with monthly credits summed at the end of the month) or annually. The following are financial examples: (typically under the cash assets and financing segments).
It means that the company can keep more cash than paying back its loans if the ratio is greater than 1. A more excellent ratio of 1.20-1.25 is preferred by most banks.
In most cases, financial institutions have Excel calculators that can create this amount, making it impossible for customers to calculate. But the borrower should understand the concept of debt servicing capabilities.
3. “Collaterals required”
Citibank: It is any sort of security the bank holds in case of loan default.
The financial institution has the power to withdraw the defaulted installments from a fixed deposit, for example. It is also possible for a FI to take possession of an asset that has been pledged.
PGs are also used as collateral in unsecured financing. A person and their family members are legally obligated to pay the debt owed to the financial institution (FI).
FIs may need fixed securities in addition to personal guarantees, depending on the risk assessments of borrowers.
Although risk appetites among financial institutions vary widely, personal guarantees (PGs) are virtually always required for SME loans, even when the applicant has excellent credit or fixed assets.
4. “Output > input”
Mr. Chang (CIMB): The total debit transactions (cash outflow) of a potential borrower could be greater than the complete credit transactions (cash inflow).
Citibank: This is identical to the DSR, but that it includes the company’s operating costs. This would be favorable if the output were more significant than the input, as long as it was not selling its goods or services at a loss.
The FCC (Financial Current Commitment) is a measure in months of how long a firm can continue to run if the corporation were to completely cease operations, which is taken into account by some financial institutions.
For example, Companies with FCCs of 3 can operate without incoming capital for three months. They are calculated by taking the six-month average of bank balances and dividing it by the monthly spending.
5. “Ultimate Beneficiary.”
Mr. Chang (CIMB): Ultimate Beneficiary Owner – someone who possesses the power and authority to control a firm and reaping the advantages of owning it — is also called UBO.
According to the Accounting and Corporate Regulatory Authority, UBOs are the direct shareholders in most SME formations. The bank may inquire as to the second layer of stockholders, and so on.
Citibank: As the name implies, this refers to the owner of a business. Companies with 80% or more of their shares owned by Company B and 20% or less controlled by an individual are deemed to have an Ultimate Beneficiary.
When you need to employ a PG rating, keep this in mind. Company A’s shareholders will need to sign as guarantors for any facility if the FI requires 50% of their ownership as PGs in this scenario.
6. “Debt exceeds BTI.”
Mr. Chang (CIMB): Balance-to-Income (BTI) ratio is also used by financial institutions to help individual borrowers avoid additional debt accumulation. It is prohibited for financial institutions to extend further uninsured loans for three consecutive months to a person whose BTI ratio has been surpassed 12 times (from 1 June 2019 to the present).
It follows, then, that a financial institution (FI) cannot continue to disburse existing limits, authorize credit limit increases, or award new facilities to such borrowers.
Citibank: It signifies that an individual’s total unsecured interest-bearing debt exceeds the BTI limit.
To calculate your BTI, tally up all of your unsecured interest-bearing balances from all of your financial institutions and divide it by your monthly income.
If an individual’s debt exceeds a specific BTI level, lending facilities may not be extended to the firm the individual owns, depending on the FI’s risk appetite.