Improving your chances of obtaining a SME Loan

For Small and Medium Enterprises accessing capital can prove to be a daunting task. Most of the companies rely on financial institutions for their investment credit and working capital requirements. However there is unwillingness among banks to provide funding for SMEs. This could be due to low profits they would make when lending to small businesses, the lack of collateral, weak cash flows and poor credit histories of SMEs.

SMEs should take a proactive approach and ensure they are fully prepared before approaching the bank for a loan. Obtaining the loan will be easier if you understand what the banks are looking for when approving credit facilities. Outlined below are strategies that we at SandS recommend to help improve your chances of securing a SME loan.

1. Establish trust

Ensure a good rapport is built with the potential creditor by being open and honest about the company. Trying to cover up business problems would prove to be futile as there is always the possibility that these issues would surface anytime. Also make sure you communicate with your potential creditor on a regular basis as this would establish a relationship of trust.

2. Have a well thought out plan

Be clear on the exact purpose of the SME loan. This will demonstrate that you have a clear sense of direction. By understanding the company’s growth trajectory, the bank would be able to understand whether or not the company would be able to settle its dues. Furthermore provide your bank with financial forecasts covering both best and worst case scenarios.

3. Keep a good credit report

Your financial figures are one of the many factors that would be considered by the bank when deciding whether or not to lend money. Have an understanding of the metrics used by the bank and ensure your business matches the standards of those metrics before commencing the loan application process. The three widely-used metrics to evaluate your loan proposal are debt-to-equity ratio, loan-to-value ratio, and debt service coverage.

4. Approach banks where you maintain deposits

You have a better chance of securing a loan if you already have an existing relationship with the creditor hence it is advisable to first approach the banks where you maintain deposits. The existing relationship would mean the trust is already established which would make it easier to navigate the credit approval process.

5. Negotiate for better terms

Be thorough on the terms of the loan agreement and negotiate the terms to ensure the best outcome for yourself. Sometimes dropping a loan covenant is non-negotiable but relaxing it may be negotiated. Present your justifications so that an agreement can be reached that best works for your business.

Written by Zara, ACMA,CGMA, BBA(Accountancy & Finance). Zara is a Finance and Commercial Executive at SandS Australia. She has 4+ years’ experience in Auditing, Finance and Accounting which helps her drive business growth.

Edited by Sam Mansoor. Chartered Management Accountant, CPA, Chartered Global Management Accountant, Dip. Equity Trading. He has over 30 years’ experience helping businesses achieve immediate and long-term success.