SMEs cut back on capital expenditure as interest rates rise

HIGHER domestic interest rates may not have hit Singapore’s small and medium-sized enterprises (SMEs) that hard yet, thanks to pandemic-era loan schemes – but amid a global rising rate environment, some are cutting back on capital expenditure to avoid taking on fresh loans.

As central banks around the world tighten policy, rates here have risen sharply since the start of the year, with the 3-month compounded Singapore Overnight Rate Average (Sora) at 1.2 per cent as at Jul 27, up from 0.19 per cent on Jan 4.

Borrowing costs this month are up 5 per cent year on year for Kok Tong Transport & Engineering Works, said Liaw Chun Huan, chief financial officer of KTC Group, which oversees the construction machinery leasing company.

Of the loans undertaken by Kok Tong Transport & Engineering Works, 75 per cent are for hire purchase machinery, while the rest are property loans and revolving loans for operational cashflow.

To avoid entering into new loans, the company is cutting back on purchases of new equipment and intends to stretch out the use of its current machines before replacement, Liaw told The Business Times.

“There’s also the decision of whether we should consider floating rates versus fixed rates (for future loans), since fixed rates have priced in higher future rates versus floating,” he added.

Hooi Yu Koh, executive chairman and chief executive officer of construction services company Kori Holdings, said his firm has cut back on the purchase of construction materials by more than 50 per cent.

“It’s a double whammy – things are expensive, and interest rates are high. So we’re trying our best to remove some of our steel structures, which are very versatile, and redeploy them in other projects,” he said.

For now, the firm will not take on any additional loan facilities with floating rates, he added. Kori Holdings has existing trade facilities with a fixed rate.

Banks, however, report stable loan demand that is even expected to rise as Singapore’s economic recovery continues.

For commercial and industrial property loans, UOB offers rates that are pegged to the 3-month Sora, said the bank’s head of group commercial banking Eric Lian. The lending rate to customers has increased in tandem with Sora’s rise of approximately 5 basis points from October 2021 to January 2022, he said.

“In the last few months, demand for property loans has been fairly stable. Although interest rates have been rising, we expect greater demand for commercial and industry property loans in the coming months. With improved business sentiment amongst SMEs, businesses are investing for the longer term,” Lian said.

Maybank has seen an “increase in demand” for asset financing from the first quarter to second quarter of 2022, including commercial and industrial property loans, with a spokesperson adding: “SMEs are recovering and many are trying to boost production and capacity, and will leverage on loans.”

The bank’s corporate lending rates for commercial and industrial property loans have similarly moved in tandem with rising global interest rates, said the spokesperson.

Liaw said that Kok Tong Transport & Engineering Works is “fortunate” to have secured a recent industrial property loan with a 2-year fixed rate to purchase a land plot at Jalan Papan. It was awarded the tender by JTC Corporation for about S$6.2 million this March.

But he expects the company to feel the impact of rising rates when it takes on a construction loan to build an industrial workshop on the land. BT understands that the predominant market practice is to offer floating rates for commercial and industrial properties under construction, though some banks offer a choice of fixed or floating rate packages.

Other SMEs told BT that they have yet to feel the impact of the rate hike, though they are making preparations as a buffer. In the last 2 years, most of them took up the government-assisted temporary bridging loan, which offers a preferential interest rate capped at 5 per cent per annum.

To mitigate the rise in rates, interior renovation company Lincotrade & Associates plans to scale up its projects and bring in more revenue, said executive director Jackie Soh. The firm has an existing facility with a floating rate.

“We will have to stretch ourselves to do more jobs, but we hope to increase our revenue by at least 20 per cent,” he said.

Though Khoo Jyh Hao, director of specialist contractor Utracon Overseas, is not overly concerned about the rising rates, he does plan to be more cautious with the construction firm’s cash position.

“The increase has just kicked in, so we’re still observing to see how the rates will impact our existing banking facilities,” he said.

In the meantime, Khoo is negotiating with Singapore clients to receive advance payments of 10 to 15 per cent for the firm’s projects, in order to ensure it has “sufficient” cashflow without seeking additional financing. The firm usually collects advance payments in its 8 overseas markets, but did not previously do so in Singapore as it is not the standard industrial practice here, he said.

Utracon Overseas will also think twice about making investments that require “huge” capital outlay, especially for its overseas operations. For the purchase of new machinery, for example, Khoo hopes to reduce expenses by 30 per cent through co-sharing resources across its markets.

“I will try to mobilise equipment from one market to the other, instead of investing into new equipment for that particular market,” said Khoo.