How Personal Loans Impact Your Ability to Secure Business Loans And Vice Versa.

As a business owner, managing personal finances alongside business obligations is crucial, especially when it comes to securing additional loans. Understanding how personal loans affect your ability to obtain business financing, and vice versa, involves navigating through financial metrics like the Debt Servicing Ratio (DSR) and various lender policies.

Debt Servicing Ratio (DSR)

The DSR is a fundamental metric used by lenders to assess your capacity to manage debt repayments. It calculates the proportion of your income allocated to servicing existing debts, such as personal loans, credit cards, and other financial commitments. A lower DSR indicates more disposable income available for new debt, while a higher DSR suggests potential financial strain.

For individuals, there are several DSR metrics that apply to you:

-Unsecured Credit Borrowing Limit: Determines the maximum amount an individual can borrow without collateral.

-Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR): These ratios restrict how much of your income can be used for mortgage and total debt repayments, respectively.

-Moneylender DSR: Specifically applies to loans from licensed moneylenders in Singapore.

On an industry level, regulators like the Monetary Authority of Singapore (MAS) may set thresholds to ensure prudent lending practices. Lenders must adhere to these limits when assessing borrower eligibility, ensuring loans are issued responsibly.

Recommended next read : we caught a broker "admitting" that they have been misleading consumers for years!

A lender looks at 5 things when assessing your loan application: (refer to this article for more.)

1)Character

2)Capacity

3)Capital

4)Collateral

5)Conditions

Impact on Business Loans

When applying for business loans, your personal financial health often plays a role in your Character as an officer of the business and vice versa. Late payments on one, may suggest to a lender for the other, that you may not be a good paymaster. This is especially so for countries such as Singapore, where directors are often the guarantors of the business loan. So even your business partners' personal loans, if overly extended or unpaid, can affect your ability to take out a business loan too. Sometimes, companies even ask their accountants to help switch out the directors because of that.

While there is currently no industry-level DSR for business loans (for business property-related loans, please refer to here for more) members of CBS, can update it making it available to other members, who may then factor it into their internal DSR. 

But as they can take some time to be updated, this is also why lenders require your latest bank statements. An injection of funds will allow them to look at the sender and try to determine if the sender is a lender and therefore a loan. They may also request it again just before signing any loan agreement. E.g they quoted you in July based on your bank statements from Jan to June. By early to mid-August, you should have received your July bank statements, and they may ask you to furnish July's.

The time it takes to update is also something that brokers frequently take advantage of. However, the broker may be doing you more harm than good. Read this article for more on how or why it may be the case.

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