Importance of credit reputation for SME business owners

Being an entrepreneur or starting up a business in Singapore is never easy as there are just too many things to consider. Besides having an ingenious business idea and passion, often the most important and fundamental component to starting a business is of course - capital. Whether it is a small home based business or Small & Medium Enterprise (SME), business owners will often have to bear the initial costs for a period of time before they start having a sustainable source of income. Sometime business owners will also realise that their misjudgement has made them overlook and incur some unwanted miscellaneous costs along the way. We all know for a matter of fact that there will definitely be rainy days when the business is just not picking up for whatever reasons. Often big decisions will have to be made, and these decisions might mean even heftier costs. It also takes a lot of time, persuasion and social networking to find a potential investor who might be willing to take a leap of faith. Then again, what if the investor decides to pull out, how can you continue to sustain your business in such unforeseen circumstances?

Applying for a business loan in Singapore

Singapore has been very encouraging and supportive of start-up businesses, there are multiple channels or even public organizations that provide SME loans or start-up funding for potential business owners. However, getting a business loan from these banks or organizations usually come with stringent criteria. How then do such organisations or banks "select" out the potential loan applicants and what kind of facts do they check against before they decide the loan should be granted?

The setting up of a consumer credit bureau in Singapore is a significant addition to enhance the Republic´s risk management capability. Since 2002, the Banking Act has allowed Credit Bureau Singapore (CBS) members to disclose and obtain credit-related information to mitigate consumer credit risk through information pooling from CBS. The Monetary Authority of Singapore (MAS) provides the regulatory guidance and support to CBS to bolster the integrity and transparency of Singapore's financial sector.

Commencing 1 July 2021, CBS has been designated by the Ministry of Law (MinLaw) as the new operator of the Moneylenders Credit Bureau (MLCB).

Importantance of credit reputation

Before a loan is granted, banks or financial institutes will conduct a background check on the financial history of the business owner or also known as, the original borrower. These banks or financial institutions are also better known as lenders who will then be able to request for a credit report of the original borrower so that they can make the correct assessment being granting a loan.

Every individual who has applied for a credit facility in Singapore will have a credit score. The credit report is a summary of an individual's personal credit facilities and total credit limit across all retail banks and major financial institutions. It is a record of an individual's credit history, and this includes detailed personal information, information about credit accounts and public records. This credit report allows lenders to assess your credit health and creditworthiness through banking data contributed by Credit Bureau Singapore members. The report is inclusive of all credit facilities contributed by banks and major finance institutions, some examples are: Secured/Unsecured Credit Cards, Personal Loan, Mortgage Loan, Car Loan, and Renovation Loan.

Through this individual credit report, lenders will be able to pre-assess the borrower's credit health and verify his overall financial standing. Borrower with a good credit score can help lenders to make better lending decisions quickly and objectively. Borrowers with poor credit score are likely to have lower chances of getting approved for a new loan as this will indicate a higher probability of defaulting future payments. Some lenders might even conduct a credit check on the loan guarantor too. Essentially a loan guarantor will hold the same liability as the original borrower therefore doing a credit check on the loan guarantor can help lenders to further mitigate risk of potential default payments especially in cases whereby the original borrower is incapable to pay up.

Lenders will usually base off credit reports as one of the decisive tool to grant a loan application therefore it is critical for borrowers to understand their current financial standing and the early measures they can take in order to maintain a good credit score.

Tips to improving credit score

Pay the full amount all the time. Understand the repercussion if you make only the minimum payment or if you have a tendency to miss your payments, your balances will snowball with the prevailing interest rates and hence making it more difficult for you to settle the remaining payments in the future. Set reminders if you have a hard time remembering the payment due dates for all your credit facilities.

Avoid applying for too many credit facilities at one go, credit lenders might perceive you as desperate or hungry for cash. Unless necessary, try not to apply for too many credit facilities within a short period of time as it will also have a detrimental effect on your Credit Score. Keep to a few credit facilities that you will be regularly using.

Use a credit monitoring service - My Credit Monitor. CBS also offer credit monitoring subscription service, My Credit Monitor (MCM) for individuals who have a hard time tracking their credit report. My Credit Monitor (MCM) is a subscription service tool that helps one to keep an eye on their credit report over a period of 6 or 12 months tenure. It helps to fight against identity theft by detecting any suspicious activities or changes that can potentially affect an individual's credit reputation. MCM will alert changes and send notification for any predetermined activities on the person's credit report, providing the earliest possible indicator via SMS or emails.

What do lenders look out for on your credit report?

Non-Scored or Public records - Lenders will look out for non-scored risk grade and especially if the individual has any record of bankruptcy proceedings, it will perceive as a high risk borrower. This information will be retained in the credit report for 5 years from the date of discharge from bankruptcy.

Bureau Score - The Bureau Score is calculated from an algorithm based on information in your current available credit data and is a fluid number which may change from time to time in tandem with changes in your credit information. Lenders will assess the Risk Grade and Probability of Default to determine if you are a high risk borrower.

Account Status History - Lenders will be able to use this information to assess your repayment behaviour for the past 12 months. This information is displayed on a rolling 12 months basis (with the most current cycle on the left) while closed accounts will have the last 12 months payment status history as at the date of closure displayed for 3 years.

In reference to sample credit report and explanation: https://www.creditbureau.com.sg/enhanced-consumer-credit-report.html

Be vigilant in manging all your credit facilities and understand the ripple effect that might come if your loan application is rejected by the lenders. Ultimately different lenders may not necessarily look out for the same indicators in the credit report when assessing the borrowers therefore the best preventive measure is to always exercise good money management and make repayments on time.

The writer is Marketing Manager of Credit Bureau Singapore (https://www.creditbureau.com.sg/). Established in 2002, it is Singapore's most comprehensive consumer credit bureau that has full-industry uploads from all retail banks and major financial institutions.