Financing products are aplenty, but why aren't SMEs getting them?

In Singapore, SMEs (small and medium-sized enterprises) represent close to 99% of all enterprises. However, numbers can become glaring quickly when we look at mortality of these SMEs – only 1 in 10 SMEs tend to survive in the face of volatile economy and tough competition.

In trying to stay ahead of the curve and drive peak performance, these businesses look to quickly acquire financing, but often to no avail.

There are several reasons and occasions when SMEs require financing.

Business expansion

A business may require funds for expansion in multiple ways. For instance, opening a new restaurant requires renovation, manpower, down payment for rental etc. Raising overall productivity will see companies investing more in new machinery, systems, and enhanced infrastructure. These are all necessary cost-bearing manoeuvres, which might, unfortunately, restrict a business’ cash-flow and spending power before it breaks even or see an increase in revenue.  

Cash flow management 

Managing cash flow is a perennial challenge for small businesses, as they may, for instance, encounter delays in payments from their clients. According to the SME Development Survey 2018 survey by DP Information Group, more than two in five (44%) SMEs are facing internal difficulties managing their finances. In the same survey, it was highlighted that the main concern among these SMEs is managing cash flow, liquidity, and credit risk (50%; an increase from 38% in 2017).

In a separate 2017 SME Financing survey by Enterprise Singapore (previously known as SPRING Singapore), 64% of SMEs currently face some form of delay in receiving payments from customers. In fact, delayed payment was ranked as the top finance-related challenge they expect to face back in 2018. When SMEs receive just a partial loan approval from financial institutions, they would still require a top-up for the remaining amount not loaned.

Supplementing new projects 

New projects usually require large capital deployment in the first 3-6 months, especially when businesses are bidding and ramping up on resources to support them. Industries which are more cyclical or seasonal in nature – such as the retail and wholesale trade – would then need a bump in their funds during these periods leading to the peak seasons.

It is important to note that such struggles these SMEs go through have never gone unnoticed. In fact, the Singapore government has been supportive in its initiatives to provide aid for these small to medium-sized businesses. There are several government-assisted financing schemes put in place which has alleviated financing difficulties for SMEs to some levels. 

Based on Budget 2019 and the list of loans curated by Enterprise Singapore, some of the support rendered by the government for SMEs include the SME Equipment and Factory Loan, which helps companies access financing to purchase equipment, machines or selected factory properties; the SME Micro Loan which allows small companies (with 10 or fewer employees) to access up to S$100,000 to support their daily operations; and the SME Venture Loan, which provides innovative, high-growth companies venture debt financing for business expansion. Government-backed SME micros loans have also been offered by financial institutions to supplement other variants of business bank loans that have been around for more than 10 years.

While steps have been enacted to aid businesses, acquiring timely financing is still an evergreen problem faced by these SMEs.

So why aren’t SMEs getting the financing they need?

According to the aforementioned 2017 SME Financing survey by Enterprise Singapore, close to 40% of smaller SMEs (those with less than $1 million annual turnover) receive either partial approval or rejection from financial institutions when they apply for loans.

Access

Compared to their larger counterparts, start-ups and small businesses have a shorter operating history and are generally asset-light, i.e. they will not have sufficient collateral to pledge for a secured business loan. On the same note, when a company starts out, it must withstand the test of time before entering the break-even or even profitable stage. This means that companies in the early stages of business might have the odds stacked against them, since financial institutions are highly stringent with company profile, performance, and risk assessments; limiting smaller and younger companies’ access to financing.

Time

Even for SMEs which qualify for bank loans and government grants, time could be of the essence for them and they might not be able to wait an average of 5-6 weeks for loan approval and a further 3 months for the actual grant disbursal. In addition, loan tenors may also pose a concern to SMEs, especially in instances when these SMEs require only short bridging loans and thus will not want to service a loan through an overly long period of time. 

What are the implications of SMEs not getting financing?

With delayed payments being one of the main issues plaguing SMEs, getting timely financing is an important aspect of their cash flow management. Cash flow is the lifeblood of any company big or small, and businesses stay afloat on cash, not profit.

Small businesses often encounter cash-flow problems when their customers pay their invoices late. Late payments make it difficult for businesses to manage working capital and pay operational fees, such as employee salary, electricity, water, rent, etc.

Delayed payments can potentially create a vicious cycle. With a lack of financing, SMEs can get stuck in a double credit crunch such that payments will be delayed from customers and companies that are similarly not able to get financing. This, in turn, leads to a burgeoning rate of delayed payments amongst companies, which is a pronounced trend we see today.

Not being able to acquire adequate financing may also mean that plans for asset-building, or business expansion in general, would have to be put on the back-burner. This is because a company may not be able to afford it, thus halting its potential for growth.

What can SMEs do?

Today, as many as 68% of all local SMEs are not equipped with the knowledge of alternative financing options when they get rejected by financial institutions.

“When without resources, depend on resourcefulness.” - Sun Tzu

The focus is also on SME owners to remain up-to-date with key financial trends that may potentially affect their business and to look out for updates to the myriad of business financing products offered by traditional financial institutions and alternative financing platforms alike. In addition, small businesses should also exercise transparency with their business information to allow for proper and fruitful assessments by banks and lenders.

In line with all that was mentioned in this article, here’s a quick overview of some business financing options that have been made available:

Peer-to-Peer (P2P) Lending (also known as Debt Crowdfunding)

P2P Lending aims to offer support supplementary to those of traditional financial institutions, to SME business owners by providing loans that can be approved in a shorter period of time and through straightforward means such as online applications. These financing products, like short-term business loans, are crowdfunded by investors. Platforms like Funding Societies adopt proprietary credit assessment models which review SMEs beyond common factors like assets and financial statements. 

Speciality loan products offered by such platforms, such as Invoice Financing, are especially beneficial to SMEs (especially those of B2B nature) as invoices paid to these SMEs can be pledged for the loan, and loan tenor can also be flexible, as compared to the more common fixed term business loans. 

Equity sharing

SME owners also have the option of exchanging a percentage of shareholding for funds with individual or corporate investors. There is no upfront cost to SMEs to adopt this option, but SMEs are required to provide their investors with regular business updates. When investors wish to cash out their shareholding, the amount that SMEs must purchase is at the valuation price, which may be more than the initial funds received.

The advent of FinTech has also opened a new option of equity crowdfunding, in which a pool of investors divides the shareholding based on their crowdfunded investments.

Using credit cards for business payments

While it’s not a new payment method, the majority of a company’s biggest expenses today typically cannot be paid by credit card – for example, payroll, rental, supplier invoices and more. Platforms like CardUp enable SMEs to tap into underutilized credit lines on their corporate or personal credit cards by allowing companies to make business payments with their credit cards, even if the cards are not accepted. This provides SMEs with instant access to pre-approved credit of up to 55 days and does not require participation from the recipient of funds, allowing SMEs to scale up quickly.

Tapping on bank overdrafts

SMEs may also write cheques or withdraw cash from their current accounts up to the pre-approved limits, and pay the interest based on the amount of overdraft. Such a facility is considered short-term, and the quantum is typically smaller than other alternative options.

Professional financial advice

In a bid to help SMEs upgrade their businesses, consultants at the SME Centres (an extended arm of Enterprise Singapore), along with partnering trade associations and chambers, offer pro-bono advice to SMEs on all aspects of the business – financial, business planning, marketing, human capital, internationalization. SMEs can make an appointment and chat with the consultants to explore suitable government grants that they can apply for that might be best catered to their needs. SME Centres also regularly hold capability workshops and group-based upgrading projects for businesses within the same trade and vicinity to assist them in their business upgrade journey.

Traditional financial institutions like DBS bank also provide support to SMEs with the introduction of The SME Academy by DBS Business Class, where SMEs can attend industry-focused events and learn how to start a business, improve day-to-day operations, and even executing business expansions. UOB bank holds educational events like “Winning in the Digital Economy for SMEs” that showcases tech solutions for businesses in the retail F&B and B2B sectors as well.

Advice for SMEs does not have to come solely from government boards or financial institutions. In fact, alternative financing platforms such as Funding Societies also offer events designed to help SMEs become productive, growth-ready, and resilient to industry or economic changes. 

Lastly, SMEs often also do not have a dedicated full-time CFO due to the high costs. This is where the CFO Centre comes in, The CFO Centre has more than 400 freelance CFOs who provide part-time CFO consulting services at a fraction of the cost of a full-time CFO. In turn, SMEs benefit by getting professional advice on their company’s finances.

Key takeaway

The SME segment of Singapore’s enterprise landscape is increasingly becoming varied in terms of size, industry and stage of growth. With an increase in demand for small business funding, financial institutions should move beyond traditional scoring as new data is made increasingly available to pave the way for more agile systems of credit scoring and risk assessment.

At the same time, each SMEs’ financing requirements can differ greatly from another. To stay abreast of industry changes and economic trends, SMEs are strongly encouraged to get more acquainted with all available financing options to get a bigger, fairer, and clearer picture of how and where to acquire business financing. It is also imperative to seek professional advice when in doubt.

Knowing which financing subset helps you at which stage of your business will greatly assist you in making your business resilient against uncertainty.