Credit Evaluation & Striking a (Financing) Balancing Act

In August 2021, we participated in a panel discussion alongside Giulianna Crivello, Head of Ventures at Draper Startup House, and Mahesh Niruttan, Chief Executive Officer of 20Cube Logistics. During the session, we touched on how companies can find a balance when raising debt and or equity, and how the space will evolve in the future. In this post, I would also like to touch on in greater detail how credit is evaluated by lenders.  

Consider this scenario, your friend has reached out to you asking to borrow $100,000 over 12 months. How would you evaluate this request, and what would be your response to her? 

In the next section, we will identify the potential questions we can ask during credit evaluation.

Purpose of funds:

What will the funds be used for? ( Always seek for borrower to disclose purpose of funds during credit evaluation)

It is important to make known to lenders how the funds are going to be utilized. The last thing lenders would want is for your friends to use the money for inappropriate purchases such as vices. Money should be going toward revenue generating activities. This provides lenders with comfort that the loan can be fully repaid at the end of maturity.

In this instance, the use of funds will go toward starting a Food and Beverage business (F&B) selling pastries. In addition, the funds will be used for hiring of manpower, and rental of the premise.

Source of repayment:

Since the tenor of the working capital loan will stretch for 12 months, how will the borrower pay off the loan monthly? What are the sources of funds?

Ask for financial forecast:

  1. What would you expect sales to be for the next 12 months?
  2. When do you expect to be profitable?

Consider the following (worst case) scenarios:

  1. How will the pandemic affect the business? How does she plan to overcome these obstacles?
  2. If the business does not perform as expected, how is she going to continue with the payments?
  3. What was her salary before, and does she have enough savings to repay in a worst-case scenario or black swan event?

Existing debt:

What are the company’s current debt obligations? (This significantly impacts the credit evaluation process)

Usually, newly set up companies have little to no debt acquired on their balance sheet. However, if the company has been in operations, you might want to examine their past financial figures. This helps lenders understand the existing debt commitments undertaken by the company in their credit evaluation process.

Existing commitments have a direct impact on the repayment ability. When the amount of monthly dues exceed the companies inflows, the company’s repayment ability will erode.

Concluding Remarks

The above are some factors that lenders take into consideration when making a lending decision. As a result, it is always helpful to have these information prepared beforehand to help funders process your application quickly. This speeds up the application process, allowing you to capture business opportunities that are time sensitive and propel your business to the next level.

We are very grateful to our partner, Fundnel, for hosting this event. You can find out more about how to strike a (financing) balancing act here or drop us an email at [email protected]

How to Increase Your Chances of Obtaining a SME Working Capital Loan in Singapore

Read to find out more about SME Working Capital Loans in Singapore.

Since the announcement of the Temporary Bridging Loan for SMEs extension to March 2022, I thought this would be good timing to share methods on how you can increase your chances of obtaining a working capital loan

At the start of the Covid-19 pandemic, government support through participating financial institutions (“FI”) eased the burden of SMEs. While many companies received this support, a large number of SMEs did not get the aid they were looking for. Ultimately, the participating FI makes its lending decisions based off their lending parameters.

Before you apply for the Temporary Bridging Loan, here are some tips that can possibly help reduce waiting time and uncertainty. 

1. Purpose of the loan:

The purpose of the loan should be as specific as possible. Try to get into the details to help lenders understand that the requirement is genuine and that the money will help propel the business forward. 

For example, you need working capital to purchase goods worth $100. You are making this purchase to service an order from an existing client. 

2. Presentation of financial documents:

It is really important to have your financial documents prepared and well presented. Lenders appreciate and find it helpful to have your reconciliation up to date to a current and accurate picture of your company’s financial standing.

3. Plans moving forward:

In the same way investors want you to pitch about your company’s future, lenders are equally interested in where the company is going over the next year or two. These plans should be realistic and backed by numbers. 

By providing lenders with a realistic roadmap, you can assure them that you will have the means to pay on time for the duration of the loan.

You can do this, for example, by sharing new contracts you have obtained, how this new contract will increase revenue, how it will impact operating expenses, and ultimately how this impacts your profitability.

It would be helpful to lay out your plans in the following format:

  • Revenue – What is the potential outcome of your new contract? Conversely, if Covid-19 has a negative impact on your business, what are your plans to ride this down trend?
  • Gross Profit Margin – As obvious as this sounds, your cost of goods should not exceed your revenue.
  • Expenses – What does an additional contract mean for your business? Would you have to hire additional headcount? How would it ultimately affect your profitability? Conversely, if your business is severely impacted by Covid-19, what are your plans to reduce expenses and to remain profitable? If you are expected to make losses, what are your plans to stay afloat? For example, we have seen travel companies pivoting to conducting virtual tours. Share these plans with your lenders to get them comfortable with putting money on the table. 

I hope you find this narrative interesting to you. If there are topics you would like us to cover or if you would like to learn more about SME Working Capital Loans in Singapore, feel free to drop us a message at [email protected]