Traditionally, banks have been an important source of finance for businesses.
Over a period of many years, they have evolved a certain set of practices that have enabled them to provide funds to companies in a manner that is profitable for the banks.
But often, the best interests of the banks and the borrowing SME do not match. When a situation like this arises, it is important for the SME to recognize it.
Well-managed businesses will be quick to spot instances where banks are over-charging them or imposing a fee that is not part of the original loan agreement.
There are several standard operating procedures which a bank would not normally tell its customers:
1. You Might Be Rejected Even Though You Are Well-Established And Profit-Making
If you require business funding and you approach a bank, the normal procedure is that firstly, you would be required to submit a set of documents for review and approval. These would include financial statements for the latest year, Income Tax Notice of Assessment copies and bank account statements for the last six months.
If you have a well-established, profit-making company that has been performing steadily for many years and you can also offer sound collaterals, it is reasonable for you to expect that your loan application will be approved.
Unfortunately, many businesses with an impeccable record are refused a loan by banks.
The reason usually falls into two categories. Firstly, the industry you operate in may not be on the approved list of the bank.
This information will not be available in any of the documents that are made available to customers.
Even when the bank rejects your loan application they will not tell you that it is because they do not finance borrowers in a particular industry.
If the bank does finance companies operating in your industry, it may still reject your loan proposal because it has reached the limit of financing that it wants to do in a particular sector.
Here too, they will not reveal the real reason that they are rejecting your loan application.
A borrowing company should keep in mind that the officer you deal with at the bank usually does not have any authority in sanctioning your loan.
2. You May Be Paying More Than You Actually Save
When your application for a bank loan is approved, you will be issued an approval document that contains the main terms and conditions.
The document will list the amount of loan sanctioned, the interest rate, and other miscellaneous terms.
But before your loan amount is actually disbursed, you will need to sign a legal document that is much longer and detailed. Most people do not read this document.
But it contains several clauses that may put a great financial burden on you at a later date. For example, if you have the funds to pre-pay your loan, you may want to do so to save further interest costs.
When you actually do this, the savings that you have attempted to make may vanish as your account would be debited with a pre-payment penalty.
You would discover that you had agreed to this and signed off without even reading the loan document at the time your borrowing limit was sanctioned.
Another way that you might lose out when taking a bank loan is that it may be compulsory to borrow funds for a three-year period when your requirement is only for one year.
In such a situation you would needlessly pay interest for two extra years.
3. No Banks Will Deny That They Are The Best
If a business approaches several banks for business financing, it is quite likely that the interest rate and the terms offered to it may vary widely.
While a certain bank may be in a position to provide your business with an appropriately structured loan that carries a reasonable interest rate, a competing bank’s terms could impose a much greater financial burden on you.
As a prospective borrower, you need to remember that under no circumstances will a bank that has a higher interest rate refer you to another bank that offers better terms.
It is crucial that you shop around and compare the terms of several banks before making the final decision.
4. You Might Not Get The Loan Within The Promised Timeframe
A bank will tell you that a business loan can be sanctioned within a period of about two weeks.
This is the time they will require to verify and review the documents that you have submitted.
In normal circumstances, a fortnight is a reasonable period of time to approve a loan.
What the bank will not tell you is that within these 14 days, more information or documents may be required from you.
After you furnish these new inputs, the bank would require additional time to review.
You can be fairly certain that the loan approval process will be a long and time-consuming affair.
In the event that you require an immediate business loan or one within a short period of time, banks would probably not be the best place to get it.
Their elaborate procedures and need for a proposal to move through several departments makes the process inherently slow.
5. Low Interest Rates Is Not Always Good. There Might Be Hidden Rates / Fees Incurred On You.
In Singapore, banks normally charge businesses interest rates between 5-7%.
This seems attractive and is a fair interest rate. A reasonable business owner should not have any objection to paying this rate for a loan.
But, it is important to remember that this rate excludes the 5-6% that is added on account of the Prime Lending Rate (PLR).
As a result, the effective rate for the borrowing company is about 10% or a little more.
When a company requires funds, a bank loan can often be the most appropriate choice.
But it is up to the borrower to discover the hidden terms that may be the cause of an unpleasant surprise at a later date.
If a SME signs the loan documents without understanding its full implications, it has only itself to blame.
There are times when a borrower may actually gain some advantage if it takes a loan from a bank.
Some banks do offer low interest rates but in these cases, it is even more important to confirm that unjustifiably high amounts are not being charged as fees.
A borrower should also verify that there are no charges buried in the fine print of the loan agreement.