On 28th April 2020, there was an article posted on the Straits Times Forum by one of the readers, “Loans to SMEs: Impose conditions rather than seek personal guarantees”.
Given our team's experience in helping Small and Medium-sized Enterprises (SMEs) to secure business loans over the past ten years, these are our personal unbiased opinions based on our key take-aways from this article:
1. The 0.1 per cent interest rate that MAS has offered to the Banks are not “trickling down” to the SMEs on the ground
Depending on the SME's financial standing, the lowest interest rate on offer now is at 2.5% Effective Interest Rate (EIR) per annum for Temporary Bridging Loan (TBL), which works out to be a flat rate of 1.2968% per annum. This means that a S$100,000 loan will incur on average S$1,298 interest per year.
Before the Covid-19 situation, the interest rate for unsecured Working Capital Loan (WCL) was at 6% EIR per annum and the bank's internal in-house loan was at 7-12% EIR per annum.
Although now the risk-sharing has increased between Singapore Government and Banks/Financial Institutions (FIs) at 90%-10%, FIs still have their own costs of operation for their business banking arms. We feel that FIs certainly can do better with the interest rates. But as they are private entities, they have their own bottom line and are answerable to their shareholders as well, being a listed company. In addition, the fact that Standard Chartered Bank and most local banks are exposed to the potential bad debts from Hin Leong Trading's loan default, banks will have to protect their loan book this year.
FYI current interest rates of 2.5% EIR per annum are the cheapest unsecured loan since Government-assisted loans were introduced in 2008.
2. The need and requirement of Personal Guarantee for SMEs
“Alternatively, instead of requiring a personal guarantee, perhaps the banks should consider imposing conditions on the unsecured loans whereby the business owners cannot use the loan monies to pay themselves or their key management team, but can use them only for operations and to pay employees. This reduces the opportunity for abuse of the almost-free credit.” Quoted from the article.
There is always a need for a personal guarantee to be signed for an unsecured loan.
We do face questions from SMEs on why there is a need for directors and shareholders to come in as personal guarantors even when they are a private limited company. The reason is, from the bank's point of view, when an owner of the company comes in as a personal guarantor, it certainly shows the company management confidence and commitment to the company for the business loan that the company has undertaken. If these are not enforced, anyone can incorporate a company with S$2 paid-up capital, take massive loans from the banks then liquidate the company, and the company will only be liable for the $2 paid-up capital.
Bearing in mind too, even when you sign for secured debts such as your personal or commercial properties, you are required to sign as personal guarantor, and notwithstanding the fact that this is unsecured lending by the banks.
There is also no way for banks to control and track the usage of the loan monies. Yes that means to say, an SME owner can take up an unsecured loan from the bank and the director can gamble the money away the next day at the casino. To have a tracking system will be too much work and costs to be implemented for the banks.
What can Banks do to help in this current period?
Based on sentiments on the ground and information we have gathered from speaking to bankers and business owners, we have a few suggestions:
1. Expedite the loan process and disbursement of funds
Almost 70% of SMEs are affected by the Covid-19 situation. Banks face a massive backlog in terms of loan processing as more SMEs are applying for TBL, and given that most of their sales and processing team are working from home, we have feedbacks from SMEs that on average, it takes almost 3-4 weeks* to get a response from the banks. Even till date, many SMEs still have not received any approval.
Online applications for DBS and OCBC turnaround time have taken more than 2-3 weeks* to get any response from the relationship managers.
Being desperate, many SMEs are turning to loan brokers to expedite the process which might help in some way but which will result in a higher cost of funding for SMEs.
* Turnaround time is based on surveys from 30 SMEs owners who have applied for business loans during this Covid-19 period.
2. Stop cherry picking or give priority to existing to bank customers
Feedback from loan brokers to us shows that some banks are giving priority to their existing bank customersbanks are giving priority to their existing bank customers who have main business operating accounts with them, or already have an existing loan with them.
We do understand that because banks already have access to track records of their existing loan customers, priority should be given to these customers as application will be much faster since they already have data for their credit assessment. But given different banks have different credit assessments, is it fair to other SMEs that are desperately in need of working capital to be rejected or asked to apply at a later date due to them being new to the bank, especially when their financial standing is qualified only to apply for that particular bank?
Can SMEs wait for another month or two to get their loan application processed without going bust?
3. Lower the loan assessment criteria?
As mentioned, different banks have different qualifying criteria such as minimum incorporation years, minimum turnover criteria, credit bureau for personal guarantors to be higher than HH rating etc.
Given the increased risk sharing of 90%-10% by the government, is this the time for banks to lower their credit assessment criteria to assist more SMEs that would usually not qualify for their criteria?
Many a time, we see SMEs that become desperate after being rejected by banks turning to P2P (Peer to Peer) & B2B (Business to Business) platforms which charge much higher interest rates to tide them over this period.
Yes, one may argue that banks have stakeholders to answer to if the default of their loan books goes up. But maybe they can allow additional measures such as allowing a third party guarantor with a good credit bureau record and high personal income, or a charge on the company’s receivables. These will help reduce their default risk and translate into a great help for SMEs during this period.
Are banks doing enough for this group of SMEs?
4. Direct submission to Enterprise Singapore (ESG) for rejected cases?
For companies that are rejected by the banks, especially for start-ups and those in the Food & Beverage sector, can there be a special department that is managed by ESG for SMEs to apply directly for the funds?
These are the companies that are most affected by the COVID-19 situation and need the funds most. We do understand that ESG might not have the relevant man-power and credit officer to implement this scheme, but maybe they can set a pre-qualifying criteria or lower the loan amount for this group of applicants.
It can be as simple as below:
- Companies need to be incorporated for more than 1 year. (this is to prevent abuse of the scheme)
- Turnover of at least S$100,000 (this criteria will allow smaller SMEs to qualify for)
- Min 2 personal guarantors - one can be third party guarantor with min HH rating and no default on their personal loans (this will allow business owners with less than ideal credit bureau rating to rope in their family members or friends to guarantee for the loan)
- Loan to be capped at $30,000 with a much preferential interest rate than the banks and with a 12 months moratorium scheme with maximum loan tenure of 5 years
Feasible idea? We can only hope….
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