Singapore’s SMEs have typically faced challenges in securing business loans. In a 2017 research conducted, it was found that up to 81% of SMEs can’t qualify for business lending. In DP Info’s 2018 SME Development Survey, 44% of SME respondents cited difficulties with managing their finances as a risk factor for them to remain a going concern. 2020 total loans to businesses will decline as well in line with the pandemic induced recession.

What are the reasons SMEs find it arduous to obtain financing? Although lending remains a core activity of banks, they are publicly listed and for-profit entities. The banks’ job is to prudently manage lending risks, not to risk depositors’ and stakeholder’s funds on unmitigated bets.

It’s traditionally been difficult for banks to conduct credit assessment on SMEs due to a lack of credit records and insufficient verifiable financial information. Further, with the smaller loan ticket sizes & higher default rates, banks find it hard to justify pouring too much resource towards this segment.

Most banks in the small business lending space usually employ some form of “program lending” system to underwrite SME loans.

Such lending systems typically emulates a “checklist” form of credit filtering where if the applicant business meets a set of predefined criteria, the application is approved if all boxes are ticked.

This form of program lending enables the banks to pre-screen and process large volume of SME loan applications efficiently and quickly. The drawback is there many deserving SMEs might find it tough to qualify due to a very straight and narrow set of predetermined criteria, leaving little room for discretionary considerations.

It is also fallible to over-segmentation. That is because most program lending models tend to segmentize broadly via industries.

On the flip side, it’s not justifiable for the banks to allocate dedicated bankers to every SME account to help with customized financing. The individual loan ticket size is not economically justifiable, unlike larger corporations with significantly larger volume and complexity of banking facilities.

This form of lending can be used as a form of pre-screen on applications. Loan officers input the data of the applicant company such as financials ratios and bank balances into their system.

This system will then spread the credit scoring of the applicant company, usually instantaneously. If all items of the checklist are met, the application will then be formally processed.

By the time an SME loan application passes the bank’s pre-qualifying lending checklist, it could just be a matter of formalizing the application approval.

Most SMEs could have their business loan applications stalled during this pre-qualification stage. Without getting through this pre-screen, the application can’t even be formally submitted and be considered.

With the advance of AI (artificial intelligence), banks’ program lending could eventually be improved. The lending system could eventually utilize some form of machine learning, data profiling, NPL monitoring and industry segmentation to provide a more granular lending system. A constant data feedback loop on asset portfolio performance can be fed back into the system in real-time.

For now, SMEs who are seeking financing from banks should try to position themselves as best as they could mirror the banks’ credit criteria checklist and compare widely across more banks for options.

Unsecured business lending will largely be assessed on repayment ability and credit conduct. Most lenders will definitely be interested to look at the company’s repayment conduct on existing facilities as well as the personal credit conduct of the business owner.

To assess repayment ability, we can also assume business profitability track record for recent years would be of interest to the credit underwriters. Assessing the current cash flow of the company’s banking accounts likely factors heavily in the algorithm as well.

The above are some criteria that probably weigh into banks’ SME lending algorithm. SMEs would take heed to optimize these factors first before submitting an application to maximize approval chances.

A good place to start for SMEs would be the SME Working Capital Loan under the EFS scheme. This loan program will essentially improve credit accessibility for SMEs with the government pledging up to 70% risk-sharing with participating banks.

With the advent of fintech, there are multiple alternative funding options for small businesses today. For SMEs who are unable to pass the banks’ lending algorithm, alternative lending options to consider would be P2P crowdfunding platforms and other online-based alternative financiers.

SMEs that are considering alternative financing sources are advised to go in with their eyes wide open. These alternative lending channels are aware only the best credit quality borrowers are going to qualify for banks’ financing. For them to take on the higher risk profile borrowers, their cost of financing would have to be higher than mainstream banks.

With most of the Covid-19 temporary government support measures such as rent waivers, wage support and loan moratoriums tapering down in 2021, SMEs should plan ahead on their financial forecasts and identify any potential cash flow gaps early on. External financing can then be considered to plug any such gaps.