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]

Spending Your Business Loan Effectively

Are you thinking of scaling up your business with a business loan?

Do you require a working capital loan to purchase more inventory?

Would you like to expand your marketing strategy to improve sales?

These are main reasons why business owners take up working capital loans from traditional banks, peers and families, P2P platforms, government institutions etc. Be sure to talk to multiple financiers/ debt providers to compare the rates provided. There could be large discrepancies which could ultimately affect the profitability of your business. 

Now, imagine that everything went as planned with the working capital loan approved. How do you ensure your business loan is spent effectively, generating the greatest returns for your business?

Build a Safety Net with your Business Loan

Allocate a portion of the business loan received as emergency funds. With looming uncertainties surrounding the business ecosystem, this safety net could act as a buffer during an emergency, or it could contribute to your bank balance which increases the likelihood of you getting an approval when you apply for working capital loans. Debt providers would feel more assured when the bank balance is sufficient as it shows your business provides them with the confidence that repayments could be done.  

Set Up Automatic Loan Repayments

Late or missed repayments are costly, adversely affecting your business credit score. An auto-debit helps manage your business loan repayment by saving your time and preventing late charges, improving efficiency, making it a win-win situation!

Tranching of Funds

It is common for businesses to seek for a loan quantum that is larger than what’s required. To them, this eases the application process which can be tedious and time consuming. Speak to your debt provider to see if they can provide working capital loans in tranches. This allows you to drawdown multiple times, saving your business expenditure on interest payments.

Conduct Budgeting Before Applying for a Business Loan

It is essential to calculate monetary needs and set appropriate budgets prior to business loan applications. This is especially important when it comes to working capital requirements. SMEs often struggle to plan with their limited resources. Besides, SMEs overlooking business priorities can also bring detrimental consequences. Budgeting provides the business owner a clearer perspective on cash flow, reducing costs, and improving business profitability. 

Utilize your Free Cash

As your business scales with positive returns, your bank balance will increase. Depending on the business’s future prospect, it could be ideal to retire some loans. However, keep in mind some financial institutions would impose charges on early payment. Conduct a cost benefit analysis before making such decisions.

Overall, acquiring a business loan can be financially beneficial for your business. It allows your business operations to run smoothly, especially during times of financial strain. It is also essential to always ensure your business has a healthy credit score to increase the probability of obtaining financing.  Click here to find out how your credit score helps you raise working capital and manage risk.

For more information, do reach out to us at [email protected] for a chat!

Soek Yee

Startup loans Singapore: Finding the right working capital structure for your company

Are you a startup founder looking for startup loans in Singapore?

One of the biggest challenges for SMEs is securing working capital financing. There are many types of financing options readily available in the market, usually categorized into three groups – debt, equity or grants.

We will be breaking down the more commonly used debt instruments below, and briefly cover the grant and equity options as well.

1. Invoice Financing

Invoice financing is a debt instrument pegged to a value portion of an invoice. It will benefit businesses with clear-cut business transactions (hardware supply, services provider) that have long credit terms. Businesses can utilize advanced capital to shorten cash cycle and reduce stress on working capital. 

There are two forms of invoice financing

a) Purchase Order Financing

Purchase Order financing involves financing the supply side of the value chain. For example, Superstar Hardware Pte Ltd received a Purchase Order from All Goods Hypermart Pte Ltd for a total of 5 fridges and went ahead to place an order to purchase the 5 fridges from Supercold Fridges Pte Ltd. Then, a Purchase Order financier would pay Supercold Fridges on behalf of Superstar Hardware.

b) Receivables Financing

In contrast, receivables financing involves advancing outstanding payments from debtors whereby work contracted for has been completed. For instance, Superstar Hardware Pte Ltd successfully delivered all the fridges to All Goods Hypermart Pte Ltd and is awaiting payment under a credit term of 60 days. Then, a receivables financier would come in and pay Superstar Hardware on behalf of All Goods Hypermart.

2. Working Capital Loans

Working capital loans typically have a termed (monthly) or bullet (single) repayment arrangement. Financiers tend to look at the strength of the cashflow, financials and key ratios of a business seeking financing. Frequently, businesses take up working capital loan is to support their day-to-day operation requirements.

3. Project Financing

Project financing is a more bespoke debt instrument where a financier will provide capital in tranches based on a project’s milestones or requirements. It relies heavily on the record of accomplishment of the business executing the project. This is because most financiers are reluctant to finance business with a lack of references. When the business has a healthy track record for completing projects, debt financiers are more likely to extend this kind of instrument. 

Project financing benefits businesses that generate revenue from project execution (constructions sector as an example) with complex terms and milestones. This form of financing provides massive relief to businesses, freeing much needed cashflows to pursue aggressive growth. 

4. Grants

Next, grants are funds given by public body or government entities for various purposes to benefit the economy or public. Usually businesses that are not yet revenue generating benefit most as repayments are not required. They can utilize grants to hire additional talent, build products, and/or to fund research and development activities.

5. Venture Capital

Lastly, in venture capital financing businesses choose to sell a portion of ownership of their company in exchange for capital to fund their growth. Generally speaking, it is usually available to businesses that have hypergrowth potential and a clear path to an exit (an opportunity where financiers can sell their equity at a higher price for return). However, venture capital is not suitable for all businesses. It benefits companies with hyperscale potential that are capital intensive (usually much more than the revenue they can generate in the early days) to scale. 

Closing Thoughts

While working capital loans are suitable for almost every company, ranging from project financing to invoice financing, each financing option comes with pros and cons. Thus, understanding the type of financing available in each category is important as it helps business owners in sourcing for capital more efficiently (avoid barking up the wrong tree). 

For a more in-depth discussion on all the above and more, reach out to us at [email protected]! Happy to have a chat on the the startup loans available for your business in Singapore!

Jake Wong

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]

How your credit score helps you raise capital and manage risk.

This article aims to help you understand more about the importance of a Business Credit Report.

Raising Capital

Unless your company is flushed with cash and you never have to worry about capital ever again, you’re probably faced with a common problem: getting money through the door is challenging and expensive. While skilled negotiation, an airtight business plan, and convincing managerial experience can take you far, there is another often overlooked tool in the fundraising toolbox that can be leveraged to take you even further: a strong credit score

When people think about credit scores, they think about individual credit scores. A person’s score has several useful and arguably necessary functions. For example, the score can determine what kind of loan you get and the rates you pay. It can also determine your insurance premium, how much you spend on your cell phone plan, and whether the landlord asks you to put down a one- or four-month security deposit. Your individual credit score, therefore, affects how much money you can access and whether you’re saving a bundle or getting hammered. In other words, with a good score people will find it easier to trust you.

Fortunately, the same credit score principles that apply to an individual can have the same impact on a company. If your company needs a working capital loan and your credit score is stellar, you’ll be able to get more cash at cheaper rates than if you couldn’t provide a score at all. If your company is looking to rent a larger space because you’re expanding, you can use your credit score to negotiate a better monthly rental and park less of your money in the security deposit. In other words, with a good score you will have more bargaining power and less cost.

Managing Risk

Raising capital is just one of the ways your credit score can be beneficial. Let’s say you run a coworking space, full of space for bright eyed startups who need are looking for a place to establish themselves. Some of them are well-run, some of them aren’t, which means that some of them pay on time and some of them may not. If you could get a quick health check on all your occupants, you’d know exactly who to talk to and who looks like they might be struggling and avoid potentially incurring bad debt. And for the companies who have great scores, you could consider offering a reduction on the security deposit to keep them happy with staying in your space. 

If your business is heavily dependent on certain players in your supply chain, having an eye on their financial health and getting their credit score can help you avert a major crisis by looking for alternatives before a portion of your network goes under. On the other hand, if these entities have strong scores, you can improve your relationship with them by providing them better terms. 

LyteScore

So how do you get a viable credit score? Simple, send us your financials and your AP/AR aging reports and we’ll churn out one Business Credit Report, according to your preference. We have two credit reports: “Lite” and “Essential”. “Lite” report is quick and easy: you’ll get your score and a breakdown of your financial metrics. If you need something more involved, our “Essential” report will give you everything the Lite report does, plus an in-depth analysis of your finances. You can apply insights gleaned from the report to tighten up areas of your business and/or use it as leverage when navigating a capital injection.  

To benefit from all of the above, e-mail [email protected].   

-Jean Butel