Improve Your Business Loan Approval Odds

Loans are necessary to grow and expand a business. However, getting business loan approval may not be straightforward. In the latest Q4 2023 RAM-CTOS BCI (Business Confidence Index) report, SMEs cited access to financing as one of the challenges faced due to the increase in the overnight policy rate (OPR) and financing rates.

However, by proactively implementing effective strategies, businesses can significantly enhance their creditworthiness and improve their chances of securing the funding needed.

Here’s how.

Choose the Correct Loan

There are many types of business loans, each with their own purposes and repayment structures. Choosing the correct type of financing will greatly improve your likelihood of getting it.

To help you choose the correct type of loan, ask yourself these questions:

1. What do you need the loan for?
   • Short-term loans for working capital (day-to-day operations) or handling seasonal variation. Examples include overdraft and trade finance.
   • Long-term loans for capital expenditure, e.g. purchasing equipment or new premises. Examples include hire purchase and term loans.
2. How much do you need?
   • Calculate the exact amount of funds you require. Do not borrow more than necessary.
3. Do you have any collateral to pledge?
   • Suitable collateral includes property, equipment, or accounts receivable.
4. How are you planning to repay the loan?
   • Using business cash flow.
   • Using another source of income not from the business.
   • Lenders will look at your debt service coverage ratio (DSCR) to determine if your business has sufficient cash flow to cover repayments.

When the bank checks that your business situation aligns with the loan requested, they are more likely to grant your business the financing it needs.

Know What the Bank Knows about You

When applying for a business loan, banks will check the 5 Cs to evaluate a borrower’s creditworthiness. The 5 Cs are:

1. Character – your reputation and repayment history.
2. Capacity – whether your income is enough to cover the loan repayments.
3. Capital – any upfront investment put towards the loan, e.g. down payment on a property.
4. Collateral – if you have any assets to secure the loan.
5. Conditions – your current financial condition, e.g. cash flow, revenue, profit etc.

One way the bank can check the 5 Cs at a glance is to pull a business/company credit score report. The CTOS SME Score Report summarizes SME credit risk instantly, enabling lenders to make faster and more consistent credit decisions.

The good news is that you too can get access to these reports via CTOS Credit Manager. For example, the information in the CTOS SME Score Report includes:

1. The CTOS SME Score, a number that represents the business’ credit risk at a glance.
2. Company profile including directorship, shareholdings, address records etc.
3. The financial health of the business, including assets, liabilities, revenue, profit etc.
4. Loan repayment history via CCRIS.
5. Any ongoing litigation or bankruptcy proceedings.
6. Non-bank payment information via CTOS electronic Trade Reference (eTR).

Know What to Fix

With this information in hand, you can take proactive steps to improve your loan approval chances. These include:

1. Repaying your debts on time.
   • Adverse credit records indicate poor management of business financial obligations, which lenders will stay away from.
2. Reinforce your commitment to the business.
   • Indicators of weak commitment include RM1 paid up capital or insufficient collateral for the loan requested.
3. Ensure you keep adequate financial records.
   • Banks will require at least three years of audited financial accounts to support a loan application.
   • If applicable, you can also show two years of projected cash flow statements for even stronger support.
4. Decrease your reliance on a single supplier or customer.
   • Lenders do not look favourably on such a high concentration risk.
5. Ensure your business has a succession plan.
   • In case the business owners or directors are incapacitated or otherwise unable to run the business, lenders will want to know if the business can still operate.
6. Don’t mix business and personal transactions.
   • Mixing personal and business transactions complicates record-keeping and allocation of liability in case the business fails to repay its loans on time.
   • To avoid this, make sure all collections and payments are done via the business’ bank account.

By implementing these strategies, businesses can enhance loan approval odds and secure the capital needed to fuel future expansion. To know if your business is a favourable candidate for loan approval, you can periodically check your CTOS SME Score Report using CTOS Credit Manager, Malaysia’s No. 1 Credit Management Solution.