What Do Banks Consider When Assessing My Loan Application?

The structure of a private limited corporation means that the SME is considered as a separate legal entity from its owners and directors. Yet, the owners and directors of the company are still an influence on the success of business loan applications. The metric that is commonly looked at here is their personal credit score.

A good personal credit score can make good grounds for your application to be approved while a poor credit score might be a factor for a failed application.

That said, a bad credit score doesn't always result in an automatic loan rejection. In this article, we break down the role of credit scores in loan assessment processes and answer the common question of how you can get a business loan even without a good credit score.

Understanding your personal credit score

In Singapore, there are no official credit scores for companies. Only individuals. Therefore your personal credit score as an owner can be one of the deciding factors considered in a business loan application.

Your credit report - which you can obtain from either Credit Bureau Singapore (CBS) or Experian - will show:

• All your past and present borrowing facilities
• Overdue and outstanding balances
• Your repayment history and behaviour
• The number of times lenders have to run a credit check on you

Based on all these, you will be assigned a credit score. For CBS, this can range from 'AA' to 'HH', in which 'AA' indicates the highest creditworthiness and 'HH' indicates a high probability of default.

Can you get a business loan with a bad credit score?

Although credit scores are clearly 'ranked', there is no set threshold or minimum credit score required to qualify for an SME loan. Similarly, an 'AA' credit score, although desirable, does not guarantee you a loan either.

A credit score is only one of many factors that are considered in a business loan application. So even if you have a bad credit score, strengthening the other factors can help improve your odds of getting your loan approved.

Here are some things you can do:

1. Get a strong guarantor

Most collateral-free business loans require personal guarantees from the company owners or directors to mitigate the risk. But if the guarantor has a poor credit score, then the guarantee becomes less effective as a risk mitigation measure.

As such, having a strong guarantor with a good credit score - for instance, a different company director - can possibly increase your chances of getting a loan.

2. Opt for a collateral loan

Many of our business loans are collateral-free with personal guarantees. But if you have a poor credit score, you can opt for 'traditional' collateral instead. This can range from real estate and equipment to inventory and accounts receivables. In fact, these usually make for a far stronger case than a simple personal guarantee.

3. Demonstrate robust company financials

While personal guarantees are a common requirement for SME loans, they are not the primary consideration. The business is. If you can demonstrate that your business has more than enough capability to repay the loan amount you've applied for, then your credit score will become a secondary consideration.

4. Request for lower financing amounts

You can also lower your requested financing amount to reduce the bank's risk and increase your chances of getting a loan approval. While you might not be able to qualify for a certain amount because of your credit score, you can qualify for lower amounts instead. This will also increase your chances of a loan approval, if you add any of the above three methods to the mix.

Preparing for the future and improving your credit score from here on out

Having a poor personal credit score undeniably affects your ability to get business loans. So from a long-term perspective, it will help you and your business if you have a good personal credit score.

For those with bad credit scores, here are five fast tips that will help improve it:

• Pay off all your loan instalments on time.
• Minimise your number of open credit facilities.
• Manage your credit card spending carefully.
• Keep the number of lenders you borrow from to a minimum.
• Don't apply for too many personal credit facilities.

Get financing solutions tailored to you with OCBC Business Banking

At OCBC, we pride ourselves in supporting our SME clients so that they can survive and thrive in these challenging times. From term loans to overdrafts, we invite you to view our wide range of financing solutions, tailored to help your business in any way possible. Apply online or speak to one of our friendly business loan relationship managers today.