There comes a time when every company is faced with the need for additional financing that is beyond what the business is able to generate through its operations, within the timeframe it is required. The reasons why additional funds are necessary can vary widely; capital financing, working capital shortfalls, capitalising on investments, ramping up production or making acquisitions, just to name a few possibilities. Having spare cash at these crucial times enables a company to ride out lean times, take advantage of current business opportunities or to ramp up capacity and capabilities for future prospects.
The most common scenario for a company seeking a corporate loan is to bridge the gap in cash flow. Cash inflows due from sales or divestments may be late whereas payments due to suppliers cannot be delayed. To have enough cash to fulfill the company’s obligations while waiting for invoices to be paid by clients, a corporate loan may have to be availed. Similarly, paying salaries on time in order to retain staff and to keep the company going is also an equally pressing reason. Another significant basis for taking advantage of loans is for making capital investments that allow a company to expand or extend its operations, thereby growing its existing business by being able to supply its clients at a greater quantity or even diversifying its scope of activities by producing complementary services and products. To serve these markets, financing companies such as ETHOZ have a great portfolio of facilities to offer.
Corporate Term Loans as the name suggests involves specific lending terms in exchange for an offer of a lump sum of money. This is a one-time disbursement and typically for a large amount. As such, it is suitable for investments that are front-loaded in nature or require a substantial deposit such as purchasing equipment, real estate or to realise expansion plans.
Equipment Leasing is one way of a quick procurement of machinery and equipment necessary to maintain or boost production. The benefit of equipment leasing is that no initial large payment is required and the burden on cash flow is alleviated by many periodic payments over the length of the contract.
Hire Purchase on the other hand, ends with transfer in ownership of the asset. Car ownership in Singapore often follows this model of financing. Upon completion of the contract, the Hirer is given an option to pay an ownership fee to take possession of the asset.
Enterprise Singapore Loans are exclusive to 15 financial institutions which work in partnership with the government’s Enterprise Scheme (EFS)1 to provide government aided loans to foster the growth of locally owned enterprises. The hurdles to clear in order to secure this form of financing are relatively high, with stringent vetting and usage of funds tightly controlled.
With such high stakes riding on applying for and successfully obtaining a loan, the process can seem rather daunting, if not downright intimidating. However, being familiar with financial institutions when grating such facilities can help smoothen the whole exercise. The objective of a financial institution needing to peruse a company’s financial and organisational information is to assess the company’s credit worthiness, business viability, risk of default, in order to price the financial products offered in line with the exposure it opens itself to2.
Minimum Documents required:
- Latest 2 years financial report of company
- Latest 6 months bank statement of company
- Latest debtor aging list
- Letter of awards/project listing (if any)
- Table of banking facilities
- NRIC of Personal Guarantors
- Latest 2 years Notice of Assessment of Personal Guarantors
The list of documents requested by financial institutions when appraising a loan request normally includes the items noted above. Past years’ financial reports give a good sense of how well the business has performed in the past and gives an insight into business cycles, trends and pattern of expenses such as repayments on other loans. A growing top and bottom line would be a good indicator of stability and thus the ability to repay its loan obligations. Likewise, a shrinking profit before tax amount might have to be explained or it would be seen as a potential risk, thereby potentially affecting the loan offer.
A historical record of bank statement is also important to quickly showcase the real net cash flow of the company. This signal of liquidity tells an accessor how much cash is normally available on a short notice period and can be used for the loan repayment.
Debtor aging essentially shows how long a company takes to collect its account receivables. A quick turn-around means that a company has less or low risk that it cannot collect payments from its clients. On the other hand, if the aging reports show many accounts that are overdue, bad debts might be possible. This is a red flag that threatens the sustainability of a business.
Letters of award and project listings delves into the future outlook of the company. It shows the pipeline of work that the company will embark on. Letters of award are binding contracts. These, together with a project listing then gives some certainty of future cash flow.
A financial institution is also interested to know how many creditors a potential client already has. This might prejudice its claim in case of default or insolvency. If there are no other creditors, it also means that there is no hierarchy of claimants, making any recovery process easier.
Lastly, guarantors reduce the risk that creditors have to bear because the individuals are personally liable for the loan. Further checks into their creditworthiness and assets will also be conducted.
Taking loans is often a vital step in a company’s journey, especially if it puts the business in a better stead to tackle the challenges of the future. With this fair bit of insight, the process is actually quite straightforward and with the right partner, it can also be a very friendly and pleasant experience.
Reference:
1) https://www.enterprisesg.gov.sg/financial-assistance/loans-and-insurance/loans-and-insurance/enterprise-financing-scheme/overview
2) https://corporatefinanceinstitute.com/resources/commercial-lending/credit-risk-analysis/
