Plugging the financing gap with alternative fundings to keep SMEs in business

WITH SMEs making up 99 per cent of Singapore's enterprises, they are a significant factor in the nation's overall economy. It is therefore extremely concerning that over 81 per cent of these businesses feel they are unlikely to grow. With so many enterprises concerned about their future, and some considering reducing their workforces or shutting up shop, immediate, rapid changes must occur to shore up the economy and protect SMEs before the picture becomes even bleaker.

Even before the Covid-19 health crisis, obtaining funding through traditional lenders and banks was challenging for many small and medium-sized enterprises. Now, with the added pressures of economic fluctuations and an uncertain future, this has become an almost impossible task for those seeking financial assistance. With a slowdown in many sectors, and consumers reducing their spending due to their own financial insecurities, the struggle to secure working capital or ease cash flow issues has become all too real for many SMEs.

Over half of SMEs surveyed in Singapore have had to turn to governmental agencies and relief programmes to ease their woes to counterbalance this lack of funding access. However, this is not a sustainable business model in the longer term, and more stable financial options are necessary for firms to continue to operate, thrive, and grow.

Traditional banking and financing methods

When an SME considers taking on debt to help them sustain their company, expand to new locations or develop new products or services, many will look towards banks and traditional financial institutions. This propensity to consider funding from a classical approach, with 60 per cent of SMEs using bank loans, may result in a knockback for most enterprises. With financial institutions often seeing a parallel between the firm's size and their credit limit, they impose restrictions on funding that may not correlate with the company's ability to meet repayments.

Some SMEs may also fall between the cracks of the services on offer by traditional banks and institutions. If they require a sum larger than microfinancing products allow, yet smaller than a corporate bank loan, they face additional challenges in finding funding that meets their requirements.

Since the global recession, many financial services tightened their rules and regulations, making it much more challenging to access funding. Now, as the world faces another economic downturn and the demand for financing products increases, many of the world's banking institutions will have the option of becoming more choosy about whom they lend money to, making it even more problematic for some enterprises to meet the requirements imposed.

This impediment to financing compounds a painful situation for SMEs as they also face having to pivot their businesses and become more nimble in their process in order to survive. Many have to become more agile and adaptable as the "new normal" unfolds merely to stay in business. They have to consider lean models by cost-cutting and reducing employee numbers while possibly investing in innovations, developing new products or processes, and experimenting with methods to stay relevant in a changing world.

Entrepreneurs and business people repeatedly cite a lack of access to funding as one of the most significant blocks to development. With commercial banks and financial institutions already considering SMEs to be high risk and costly to serve, the current economic situation is likely to increase the barriers to funding for growth and sustenance.

Alternative lending models

With many of the established financial institutions failing to service the SME community's needs, alternative financing firms such as Jenfi are stepping up to bridge the gap. These fintech innovators use real-time data and other metrics to calculate the risks and support companies when they need it most. They help to unlock opportunities by offering credit and providing financial assistance as businesses strive to recover from the country's circuit-breaker lockdowns and a reduction in spending for some sectors.

During the pandemic, many firms suffered significant losses, but, with some financial assistance, would be in a position to return to pre-Covid levels of business. Some may have to rethink their business models and adjust, possibly moving to eCommerce models rather than bricks and mortar stores, or develop new products.

As fintechs use innovation and data to create their products, they are better situated to provide credit to new initiatives than banks. Traditional financial institutions often rely heavily on historical track records or data that does not readily apply to many startups. By leveraging technology, such as blockchain or big data, fintechs can swiftly step into the breach and provide the necessary funding.

One area that many firms are having to invest in more than ever is marketing. Jenfi looks at the ROI on marketing for a new SME or one that is pivoting, and if there is evident potential, they can assist the business financially.

Flexible repayment models

As fintech companies often provide revenue-based financing plans, they create more flexible repayment schedules for SMEs. This format essentially allows an entrepreneur to develop their business while paying off the loan based on earnings and sales, rather than the tightly structured, inflexible, interest-heavy models employed by banks. Many alternative lenders take a stake in the company they are funding, becoming a partner to the business, supporting its growth and ensuring due diligence and productivity.

By providing a more agile format, fintechs reduce credit costs incurred by SMEs, providing them with a better launchpad for their growth and sustainability, while banks and lending institutions are stuck with outdated distribution channels and methodologies.

The pandemic shone a spotlight on the inequalities of financing and highlighted the need to plug the current system gaps. The challenging economic times make it even more crucial for SMEs to re-examine their business process, cut costs and pivot to more efficient and productive working methods. To do this, many need a cash injection or financial support if they are to maintain or increase their market share and secure a future for their company.

SMEs are active in a vast array of industry sectors: from small village crafts to medium-sized tech firms specialising in engineering. Regardless of their marketplace, be it selling directly to locals or exporting overseas, SMEs of all shapes and sizes are requisite for Singapore's future. They are critical drivers of the economy and require the government, regulators, financial institutions, and citizens to support their efforts.

To continue to thrive and meet consumers' needs, SMEs require working capital and to be able to access external funding when necessary. They are often let down by the traditional banking and financing infrastructure, but as fintech evolves and the digital revolution takes a deeper hold, new methods and models for funding become available. Through improved cash flow solutions, alternative financing firms help to keep companies afloat during uncertain times.

By assisting SMEs in overcoming the financial factors limiting their growth, fintech companies and the eCommerce sector are providing opportunities that support and service the small to medium-enterprise sector and help create a more secure economic future for the whole of Singapore.

• The writer is the co-founder of Jenfi and former co-founder of GuavaPass