What is good & bad about borrowings & where you can find cheap financing
Cash is king (article on 11/3/2019) and cashflow is the lifeline of every SME in Singapore (article “Profit or loss shows profit but no cash in bank” on 8/3/2019). Not all SME are blessed with owners or shareholders that have the financial means to internal fund the business. Most if not majority of the SME will need externally funding from the start or at some point in time typically during the expansion phase. The issue for borrowing is you will find it hard to get when the times are bad and when you least needed it, you often get unsolicited calls for bankers trying to promote some cheap funding to you. Bankers are called “fair-weathered bankers” not for no reason.
The learning lesson for borrowing is to get that facility or amount in place way at a cost that is acceptable to you before you need it. As when you really need it, the funds may not be there for you or even if it is available, it is given at a unpalatable costs.
There are a few ways that a SME can explore the financing:
- Search the internet for financing website
These are typically forum or website that specialising in discussion or promoting of a specific interest for users looking for financing needs. Some may be more towards informative sites that focuses on users traffic and promoting a certain banks whom sponsor the site advertising. Others may be advisory sites drawing attention to its fee based financing services that drawing commission from the banks for each referrals. It is a good and quick way to get a scan of what are the current borrowing terms (ie on board rate, 3MSIBOR) and what are the current level of borrowing costs. These are usually generally and you would need to go one step further in hitting the links to the specific bank websites or provide further information to the inhouse services before you could get any specific borrowing terms.
- Go straight and call a few banks
The most common way of borrowing is to go and call up a few banks directly. This usually will take up the most time as you would be dealing with the bank directly for providing all the necessary information. Different banks have different information needs but generally they required a standard staple of documents – recent bank statement, latest management financial statements, ACRA business profile, Company Constitution, list of wealth or commitment for directors or shareholders. The duration of the documents may varies from bank to bank, some requires last 3 months of bank statements, other requires 6 months or even last 3 years of financial statements. The key challenge is for most SME, documentation was never a forte and getting that historical information that stretches beyond 1 year for financial statements or beyond 3 months for bank statements is for some, like pulling teeth. The key is to be effective and efficient in navigating the various banks to identify the information needs that best accommodates what the SME currently has but also most important, understand what are the key credit priorities that the bank are looking for. Some banks detest the sight of bounced cheques in bank statements as a bad credit vibes, other looking for a minimum cash inflows and outflow to be meaningful for a credit, or some are precluded for the time being for taking client from a particular industry eg construction or gaming, while others are laissez faire on bank statement and focus more on the credit worthiness of directors. This brings us to the next point.
- Consider looking for a financing specialist company that assist in getting that financing. There are company that specialised in helping companies to get financing. These are companies that understanding the financing landscape, working with banks and have an in depth knowledge of what each bank are looking for in the next customers. As they are typically in tuned with the information requirements and usually the bare minimally information will be required from you. In most financing cases that we have seen, more is less and less is more. They are able to analyse your current company credit worthiness by looking at your bank statements, financial statements, business activities, customers’ profile, business model, deal pipeline and match your profile to the best suitable financers be it financial institution of non-financial institution (non-bank financing companies). Sometimes working too hard and throwing out your credit information to all banks may not be the best as any unpalatable credit information may lead to a “no-pass” credit rating by any bank will goes towards forming a bad credit vibes on a SME credit profile. The said SME may then find it increasingly difficult later to secure any financing from the said bank or other banks. So it may be good to exercise some caution before you proceed on that machine gun dumping approach to any bank in the street. Some of the financing specialist may charge a one-off documentation fee and an ad-valorem rate that is chargeable upon the success securing of the financing.
The other aspect to consider besides the usual commercial borrowing will be the availability of any government assisted financing through most local banks or financial institutions. Consider government financing schemes which typically offers a much lower interest rates (ie SME Micro loan interest rate of 6.5% to 8.75%) vs the usual commercial borrowing rate (> 12%) and with no collateral. Some of the schemes available are:
- SME Micro Loan available for local SMEs with annual turnover $1M or less OR employees 10 or less and requires minimum 30% local shareholdings (Singaporean or PR). Maximum funding amount $100K with repayment period up to 4 years.
- SME Working Capital Loan for local SMEs group annual turnover <$100M or group employment size < 200 and requires a minimum 30% local shareholdings (Singaporean or PR). Maximum funding amount $300K with repayment period up to 5 years.
- Loan Insurance Scheme (LIS) for credit insurance for SMEs to obtain trade finance facilities from financial institutions supported partially by Enterprise Singapore and requires a minimum 30% local shareholdings (Singaporean or PR. Used for financing of inventory, factoring/receivables discounting & pre-delivery working capital.
- SME Equipment & Factory Loans up to $15m for the automating/upgrading of equipment or purchasing HDB/JTC premises and requires minimum 30% local shareholdings (Singaporean or PR)
- Internationalisation Finance Scheme (IFS) for asset based financing scheme for purchase or construction of factories/production facilities overseas or structured financing loans for funding of working expenses of secured overseas projects, banker’s guarantee, performance guarantee, merger & acquisition financing for overseas expansion.
However, one should not be too obsessed about getting that lowest possible interest rate out that but rather whether the other financing terms ie the financing amount and duration of the loan is able to fulfil the investment or funding requirement. There is little relevant for a 3% borrowing rate if the amount available is only $50k out of the $200k of funding gap that you are looking for. Or if it is for a repayment terms earlier than the maturity of the investment in question even if the quantum is available. If the borrowing rate is at 8% and you are looking at a return of 12%, a meaningful spread of 4% is what is relevant. The critical factor is to get that funds quick before that investment opportunity goes away.
The next step is to ensure that the financials are updated timely and the key relevant information that tracks the true performance of every borrowing. That includes the following:
- interest payment to each different categories of borrowing shown separately in the monthly profit or loss statement, tracked against the return if any of the investment upon which these borrowing are directly funding;
- The balance of the outstanding loan in the statement of financial position (or balance sheet) for the outstanding obligation and the funding base as well as the obligation due within 1 year (current liabilities) and more than 1 year (non current liabilities);
- cash cost for the true cashflows in the statement of cashflow either within investment activities if these is a purchase of plant or machinery for income production or financing activities if these are part of the overall financing strategy or part of operating cashflow for a operating funding overdraft.
- Other relevant indicators include interest cover, gearing ratio, specific loan covenant if there is any loan covenant restriction under the financing arrangement. For the latter, it is crucial as any breach in loan covenant will result in the breach of the financing arrangement and a consequential early recall of the outstanding loan. An important indicator that requires forward and forecast tracking so as not to cause unnecessary strain on the company cashflow and impacting the going concern of the company (article “Many a time and oft In the Rialto you have heard going concern issue, So what is that? April 18, 2019).
Therefore getting your accounts update regularly and correctly is important to give you a timely and relevant view of your business performance, borrowing costs, investment return net of direct borrowing costs, how are the future funding obligation supported by the returns from the business through cashflow statements and forecasting.
Whichever way you go about to get that financing in, be it searching the internet on deals yourself, talking to bankers directly or getting a finance specialist to source for you, it is always good to plan ahead. As the saying goes, there is no free lunch in the world, cheap things are not always good and definitely it is very rare in this competitively world to find free things that are of any meaningful value. Any sensible investors know that if a deal is too good, it is likely to be a scam. And last but not least, ensure that you put in place a good accounting system or get a good accountant to track these, else you will never know for sure whether the financing is indeed effective, beneficial and getting the bang for bucks.
What gets measured, gets managed and If you can’t measure it, can you even manage it ?
(You may want to read on the article “7 mins to manage your company with just 7 reports” May 27, 2019)