Issue 15, Jan 2018 - A Strategic Approach to SME Financing

By Benjamin Teo, Linkflow Capital Pte Ltd
“A bank is a place that will lend you money if you can prove that you don’t need it” - Bob Hope
As cliché as this statement sounds, it does sum up in a simplistic way how the underlying fundamental of banks’ credit assessment work.
Many SMEs (small and medium enterprises) continue to struggle with access to financing amidst the economic slowdown from 2015 to 2016.
In a 2016 SME Development Survey conducted by DP Information Group, cost of financing is now the fourth biggest issue faced by 22% of SMEs respondents, up from 6% in the previous year.
In another Visa and Deloitte Digital SME Banking Study conducted in 2015, it was found that 40% of SMEs in Singapore have no access to banking support.
There is no doubt that SMEs form the core of Singapore’s economy, making up 99% of all enterprises, employing two-thirds of our labour force and contributing to about half of Singapore’s GDP.
The Singapore Government recognizes the critical role small businesses play in our economic makeup and spares no effort to support SMEs in restructuring and internationalizing.

In terms of improving SMEs’ access to financing, the Government has also introduced the SME Working Capital Loan, a risk sharing financing scheme announced in Budget 2016.

Having less resources and not as well capitalized as bigger corporates, SMEs have long cited lack of access to financing a key reason for business failure and inability to expand.

To improve access to capital and funding, SMEs should take a more strategic approach when it comes to financing.

State of business lending in 2017

Total bank lending to businesses declined for 12th consecutive straight months as of September 2016. The main reason attributed to the slowdown in credit growth was due to the sluggish domestic economy and the escalating problem loans in the marine offshore and oil and gas industries.

The outlook turned slightly rosier more recently in April 2017 as lending to businesses expanded for the fifth straight month to $379.4 billon, a 9.5% increase from last year.

Bank loans in October 2017 were up 6.8% from a year earlier with business loans rising 1.9% from previous month to S$390.7 billion.

The economic slowdown seems to have bottomed out in 2016 as the Ministry of Trade and Industry (MTI) expects overall growth to be slightly better than 2016’s 2% on the back of external outlook improvement.

Singapore’s economy grew 5.2% in Q3 of 2017, which is the fastest in nearly 4 years. MTI is expecting full year GDP growth for 2017 to be between 3-3.5%.

What does this mean for SMEs?

As we can see from the data above, credit growth and availability in domestic banking systems are heavily correlated with macro-economic conditions.

Banks tend to tighten credit flow when the macro environment is not positive.

As Singapore enters the “new normal” of slower economic growth of 2-3%, SMEs will have to adapt and position themselves accordingly.

Credit will not be as readily available compared to the decade following the Global Financial Crisis from 2007 when global banking systems are sloshed with excess funds due to QE (quantitative easing) measures undertaken by central banks worldwide.

SME owners must recognize the fact that banks are institutions in the business of managing risk. The SME financing loan book is typically regarded as a high-risk segment for banks due to lack of credit information and correspondingly higher default rates.

In a period of sluggish growth and macro restructuring, SMEs should be more strategic when approaching financing. A simple way is taking the initiative to bridge the inherent disconnect between financial institutions and small businesses.

Manage expectations gap between lenders and borrowers

In the course of our work as business financing consultants, we often undertake the middle-man role between lenders and SMEs.

We realized there is a distinct disconnect between the two parties in terms of an expectation gap.

Many SME owners expect banks to play the role of enabler. They often lament that if the banks are keen in expanding their SME loan books, they should not impose credit criteria that are too onerous. The tedious underwriting process and documentations is often a bug bear to some SMEs.

On the other hand, bankers are often stuck during the credit evaluation process as some SMEs are not able to produce full documentations and information required for proper loan assessment.

Bankers would expect SMEs to comply with the full credit assessment process for them to complete their credit evaluation.

SME owners typically struggle at this stage because unlike bigger corporates, they don’t have the resource to hire a CFO to specifically handle the company’s financial matters.

At times, they are unable to understand banker’s queries on their working capital gaps, inventory turnover ratio or gearing ratio; typical questions involved in the credit assessment process.

We would often have to communicate to business owners that the onus is on borrowers to comply with the credit underwriting process as much as possible. The banks are the ones coming up with capital and undertaking the full risk of loan underwriting.

SMEs should take efforts to keep their financials up-to-date and keep on top of their cash flow. If it is not efficient to maintain an in-house CFO, they should outsource their bookkeeping and accounting functions to a competent accountant whom can provide monthly cash flow reports and figures.

By managing their financing expectations and taking the perspective from the financier’s point of view, this expectation gap between lender and borrowers can be minimized.

Match financing instruments with intended purpose

Another common mistake SMEs usually make is not matching the financing instruments they undertake with the intended purpose of financing.

Many SMEs will opt to apply for unsecured term loan which loan tenures are typically 3 to 5 years when they require financing to plug cash flow gaps.

Most of these cash flow gaps occur because collections from receivables slowed yet the company must fulfil payments for monthly overheads and to suppliers.

Term loan is the preferred choice of financing product for SMEs as it’s plain vanilla simple and provides immediate cash infusion to paper over working capital cracks.

This is however not the optimal solution, as working capital gaps are usually short term in nature and resolved in a matter of months. Term loan with tenure of 3 to 5 years should be used for assets acquisition that is expected to turn around positive ROI within the same loan repayment period.

For short term working capital gaps, revolving short term credit facilities should be used instead to match financing tenure with requirement. Examples of short term financing facilities include trade financing line, invoice financing or factoring. 

These revolving facilities have tenure between 30 to 90 days and are suitable for plugging gaps in trading cycles, working capital and inventory turnover.

When SMEs make the mistake of pairing mid to long-term financing instruments to finance short term working capital needs, they’ll find themselves saddled with heavy monthly instalments after a few rounds of financing.

Seek deeper relationship with your bankers and financiers

Most SMEs regard banking services as highly commoditized and rarely attempt to deepen working relationship with their bankers.

It is important for SMEs to identify the strengths and preferences of various banks and further cultivate relationships with suitable banks. Business owners should take some time to compare business loan in Singapore when seeking financing to source the bank with the best fit in terms of credit appetite and underwriting preferences. 

For example, for a small business that do a lot trade with countries in South East Asia such as Malaysia or Indonesia, our 3 local banks are a great choice as banking partners. With an active franchise and regional footprint in South East Asia, our local banks can extend support and share know-how in other countries to help with your business.

If most of the SME’s supply chain or customers are based in Europe or USA, global banks such as HSCB or Citibank might be better choices for trade financing due to their wide network and presence in the west.

SMEs whom are in asset intensive trades such as precision engineering, heavy construction equipment or coach bus operators should establish relationships with specialty asset based lenders.

There are many financial institutions that specialize in asset based lending such as equipment financing and leasing. These finance firms might not be able to offer full spectrum of banking products like banks but can tailor equipment or machinery financing customized for the needs of SMEs.

With the advent of fintech, alternative lenders in the P2P crowdfunding scene have also emerged. Many of these platforms can deliver factoring and invoice financing services much faster and more efficiently than mainstream banks. SMEs in security or commercial cleaning industries will find these services a good fit with their financing requirements.


SME financing is not a complex topic to grasp compared to other more exotic funding methods such as mezzanine financing and venture capital funding.

Financing for SMEs however does have its nuances, risks and challenges for both borrowers and lenders.

Without an efficient and progressive system to improve the allocation and movement of credit in our banking systems, SMEs will not be able to fulfil their full potential. Some deserving and promising companies might not be able to innovate further with lack of funding and capital.

Thankfully in Singapore, our government does recognize that a vibrant SME sector forming the backbone of the business landscape is a net positive for the general economy.

With initiatives such as the SME Go Digital Programme and the various government assisted financing schemes, SMEs have the necessary resources to grow and adapt to the future economy.


About the writer:

"Benjamin is in charge of content marketing and business development at Linkflow Capital, a SME business financing consultancy firm."



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