SME Business Loan Financing Guide

1. SME Business Financing Guide Ultimate Resource Guide The complete resource and guide to SME financing overview, loan products, improving cash flow & banks credit criteria.

2. Resource Guide Outline c For Whom Directors, business owners & finance managers of SMEs operating in Singapore. Purpose Introduction to SME financing, loan facilities, managing working capital & cash flow, documentations + key criteria in credit assessment.

3. SME Financing Landscape Below banks, financial institutions & alternative lenders are active participants in local SME financing space.

4. Loan products • Unsecured Term Loan • Unsecured funding for working capital needs, no collateral required • Turnaround time for assessment 2-3 weeks • Commercial/Industrial Property Mortgage • Secured loan to finance assets acquisition • Can also pledge unencumbered property to banks for facilities • Property financing usually bears lowest rates.

5. Loan products Factoring/Receivables financing 01 02 03 04 w Z infographic • Factoring is short-term borrowing used to improve working capital and cash flow position • Business sells its receivables invoices to a bank/FI at a ‘discount’ rate • Banks/FI advance 80%-90% margin of the invoices value in cash to company • On notification or non-notification basis

6. Loan products Trade Financing 01 02 03 04 f 4 • Revolving credit line finance materials & inventory from local/overseas suppliers) • Able to use LC for overseas suppliers to reduce risk of international trade • Banks pay supplier directly while granting 90-120 days credit terms infographic • LC/TR trade lines & local invoice financing

7. Trade Financing Contract 01 Seller Buyer Letter of Credit Application 04 02 Advice of Letter of Credit Keyword Advising/Confirming Bank Issuing Bank 03 Letter of Credit

8. Loan products • Machinery/Equipment/Vehicle Loans • Financing to acquire asset • Interest rates typically lower due to security provided in favor of banks • Typically structured in form of hire purchase • Business Overdraft (OD) • Revolving credit line for short term funding requirements • Interest accrued only when utilized

9. SME Financial Management w + Managing Cash Flow Cash flow is the lifeblood of every business A rule of thumb in managing cash flow is to delay outflow of cash as long as possible and expedite receivables from customers as fast as possible

10. Profit is not equal to cash flow "Profit / Loss“ are figures of how much money you have made/lost after deducting all business expenses At point of sale, may not receive payment yet "Cash flow" is the difference between cash inflows and outflows of your business transactions P&L profits might not reflect actual profitability of a business if cash flow negative Concept of “Profit” versus “Cash Flow”

11. Profit vs Cash Flow Although both companies reported same profits, company A has better cash flow management as it’s able to collect higher deposit from it’s sales while having longer credit from suppliers

12. Improve Cash flow Financial management Diversify procurement Improve profitability Forecast cash flow Forecast cash flow Create 12 months cash flow budget and forecast Diversify procurement . Look for alternative supply sources that is cheaper. Negotiate credit terms with supplier Practise financial management discipline Raise money ahead of time, spend only where necessary & invest in assets that can generate more business and cash. Improve profitability instead of revenue Look into ways to reduce your buying price and manage your operating costs

13. Debtors Management Control Review debtors list frequently to monitor ageing Agree payment terms in advance Establish proper credit practices & control Establish limits for each category of customer - never allow exposure to slip beyond these limits Constantly review the limits during slow economy periods or to customers in weak industries Agree up front payments or payments on completion of milestones Improve collection turnaround cycle –Try to negotiate advance payments for goods/services with credit terms Improve Cash Flow

14. Inventory Management Control Carry out frequent stock takes Know the number of times each major item of your stock turns around in a year Consider selling slow moving inventory at a discount or bundle with other products. Analyze stock by product type and identify fast moving inventory / stock Review security process to ensure no stock pilferage Review production process and eliminate bottlenecks which delay delivery Increase stock turnover cycle - Procure just-in-time or carry stocks that have faster turnover Improve Cash Flow

15. Financing Golden rule of financing Do not take short term borrowings to fund long term assets Aggressive Use short-term financing to finance permanent assets. Moderate Match the maturity of the assets with the maturity of the financing. Conservative Use permanent capital for permanent assets and temporary assets.

16. Financing Temp. C.A. Short Term Loans $ L-T Fin: Stock, Bonds Perm C.A. Fixed Assets Years Lower Dashed Line Would be more Aggressive

17. Financing Loans with Equity Conversion Rights Angel Investors/ SEED Financing Accelerate Business Growth Financing Options Equity Injection with Exit Plan Unsecured Term Loan Working Capital Financing Accelerate Business Growth Debt Financing Hire Purchase for Equipment Asset-based Financing Hybrid Financing Injection of Capital Private Equity Financing Equity Financing LC/TR Financing Term Loan Factoring of Debt

18. Business Loan Application Business must illustrate that it has Good banking conduct, ensuring there is always adequate cash balances and no record of bounced cheques No past or current litigation that will adversely affect the business going-concern. Good credit history, which applies to both the business and the business owners

19. Business Loan Application E.g. of litigation search report on companies/business

20. Business Loan Application Sample of individual credit report. The alphabets reflects the payment status: A:< 30 days past due B: 31-60 days due C: 61-90 days due D: > 90 days due F : Closed with outstanding balance W - Default

21. Business Loan Application To improve business loan application approval chances: f Have a concise business plan that explains the business growth, loan amount required, use of funds and expected repayment means Provide good quality historical financial statements, preferably audited, and up-to-date management accounts

22. Common documents required Latest 2 years financial report Latest management accounts Last 6 months operating bank statements Latest GST returns (if GST registered) Latest debtors and creditors aging list List of major suppliers & customers details Recent contracts/projects listing Directors’ latest 2 years Notice of Assessment Business Loan Application

23. Documentations Bank statements presents current view of company’s operations. Generally, banks will look out for returned cheques/Giro due to insufficient funds. Total deposit figures/month indicate if there’s drop in revenue compared to previous years revenue Average cash float maintained in statements is indicative of cash flow health. Very wide gap between highest & lowest bank balance figure might indicate cash flow volatility Improve Cash Flow

24. Business Loan Application Documentation 01 02 Most banks generally do not finance to loss making or negative net worth companies Financial statements are most important document for credit assessment 03 Most banks will screen financial statements key ratios to determine credit worthiness

25. Business Loan Application Common ratios in financial statements analysis Current ratio A liquidity ratio that measures a company's ability to pay short-term obligations Current assets / Current liabilities i.e. = $2,680 / $1,145 = 2.34x

26. Business Loan Application Receivables turnover days An accounting measure to quantify effectiveness in extending credit & collecting debts. Receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets Average Creditor payment period Trade Payables/Credit Purchases x 365 = Average Payment period in days Receivables Turnover Ratio Net receivable sales/ Average net receivables Average Debtor collection period Trade Receivables/Credit Sales x 365 = Average collection period in days Average Collection Period 365 / Receivables Turnover Ratio

27. Business Loan Application Common ratios in financial statements analysis Gearing ratio Compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds. Gearing Ratio = Long Term Debt/ Share Holder Equity

28. Business Loan Application Common misconceptions about financing Business owner do not want to pledge personal guarantee. No bank will lend without PG from director, especially so for unsecured lending. Providing PG indicates directors are confident of repayment and is a form of assurance. Not willing to increase paid up capital. It is tough for banks to lend to company with $1 capital. Directors need to have some ‘skin in the game’ before banks are willing to lend as it indicates directors are vested in company as well.

29. Business Loan Application Common misconceptions about financing Banks should lend to those who need funding. Banks are not non-profit organizations, need to answer to shareholders and board. They can only finance borrowers who can display the ability and means to repay. Documentations are a hassle. Some companies reluctant provide full info & documents required by banks. Banks require standard documents to process applications and no banks will be able to provide assessment without.

30. Summary We hope you’ll find this guide a useful resource for SME financing and cash flow management. Compare all banks business loans Free online loan assessment tool See My Loan Options Instantly!