How SMEs can be both bankable and credible

By Janus Lim, Founder and Managing Director, Finaqe Group

In light of the COVID-19 outbreak, Singapore’s economic landscape looks bleak. Several forecasts have already downgraded the city-state’s growth numbers. Additionally, the possibility of a global recession looms, with additional ramifications on Singapore’s exports – indicating a prolonged period of economic uncertainty.

Now more than ever, firms are faced with immediate concerns of survival. Consumer-facing industries such as food and beverage (F&B) and travel, in particular, are seeing the adverse effects of the COVID-19 pandemic.

The survival of numerous Small and Medium Enterprises (SMEs) is at stake, and failing to implement prompt pre-emptive measures could spur a spate of business closures, especially if they cannot raise the funding they need. Indeed, we are already seeing this take place.

SMEs in trouble

Even during normal times, SMEs are faced with a slew of operating challenges and it is difficult to get funding. Lack of credit histories is a major impediment and SMEs often do not have the right financial management skills. This is largely due to inaccessibility to experienced professionals who can assist with critical functions such as cash flow management.

One reason SMEs struggle with obtaining financing is a lack of financial knowledge – entrepreneurs often hail from marketing or business development backgrounds and neglect processes like cash flows. Small businesses often need to extend credit terms, and the longer these credit terms are, the bigger the impact is on cash flow management. Many SMEs in Singapore do not have any professional help in this respect – they work with an accounting firm once a year to close their accounts, but not for financial advice.

If SMEs are dealing with big companies that are financially strong, they usually need to extend credit on generous terms and wait for payment. Should they want timelier payments, they will have to transact with smaller companies that could be riskier because smaller companies may struggle with their own cash flows as they are more susceptible to a various risks including financial risk, strategic risk and business interruption risk. Many SMEs do not realise this till their cash flows get jammed up. They will then approach banks for funding, but banks are unlikely to provide funding because the bank statements provide a poor reflection of the companies’ financial health. Owing to this, SMEs are trapped in a vicious cycle because of their lack of financial knowledge. Thus, there lies a gap between an entrepreneur’s perspective versus the reality of what the banks look for.

Present day troubles and working capital woes

With the implementation of the Circuit Breaker, Singaporeans have been encouraged to stay home, impacting a wide range of businesses have been impacted, particularly the F&B, hospitality and travel sectors. According to Dun & Bradstreet, as many as 5,128 companies have ceased operations or cancelled their registrations, while an additional 238 went into liquidation in the first quarter of 2020. Bankruptcy applications increased 69 per cent year-on-year to 1,278 in the first quarter of 2020, indicating that COVID-induced economic slowdown and associated measures to mitigate the pandemic have had a particularly adverse effect on business enterprises in Singapore, of which 99 per cent are SMEs.

Almost all businesses have seen their cash flows being negatively impacted as the circuit breaker has almost brought all economic activity to a halt. Retail stores are shut, people cannot dine at restaurants, and tourism and international travel have ground to a halt. Other sectors are not immune to the impacts of the pandemic either.

This failure to take charge of working capital can result in the risk of financial insolvency. Working capital is needed to pay for current expenses – including payroll, material inputs and other operating costs. Funding can make up for working capital deficiencies, but without proper cash flow management, obtaining funding becomes more difficult even though balance sheets may be sound.

Government measures helpful, but not enough

While targeted measures and aid have been announced during the Budget 2020 and by the MAS, banks continue to be inundated with loan applications. Many SMEs are still unaware of viable financing avenues and their application processes, leading to subsequent rejections.

Even with the Singapore government assuming 90 per cent of loan risk, funding is not necessarily easier to obtain for SMEs. For the banks, the processes involved in disbursing loans and retrieving defaulted loans are still cumbersome. Separately, and more importantly, banks cannot overlook due diligence procedures simply because the government is assuming risk too. Banks continue to be hesitant to service unviable borrowers to avoid non-performing loans. According to Deloitte’s report on how companies should manage their cash flows during crises, firms have to take concrete steps to assess their financial health and credit risk. By doing so, they can increase their chances of getting a loan.

Businesses must innovate to ensure a higher chance at success amid numerous pressing challenges. SMEs have to digitise and explore online sales channels since any business that cannot operate online stands severely handicapped in the current situation – which can be the ‘new normal’ in the foreseeable future. Without online channels, their sales will only plunge further, depleting cash reserves in the process. We have seen an upsurge in enquiries from such companies. For companies that maintain an inventory, their orders may also be delayed resulting from supply chain disruptions. These are difficult issues borrowers have to work around in order to demonstrate their repayment ability.

Bridging the Gap

Overcoming business challenges is more than just obtaining funding. However, funding eases cash flow management that is foremost for SMEs. With the pandemic raging on, SMEs are treading a fine line and should seek professional assistance to ensure their short-term viability and long-term sustainability.

There is a discernible gap between SMEs who seek financing and the expectations of financiers seeking credible borrowers. There is a general lack of information pertaining to successfully obtaining financing due to confidentiality measures and also because lenders do not reveal their processes and credit criteria. Companies can, however, improve their eligibility for financing by taking steps to manage their finances and their cash flows better.

The first step that companies can take is to undergo a professional financial assessment to determine their financial health, evaluate credit risk, identify the financing needs of their companies.

From unbankable to bankable

The all-important issue plaguing SMEs is the difficulty in obtaining funding, which stems from poor cash flow management. As such, the underlying objective for an SME should not merely be to obtain the funding it may need at a specific point in time, but to drive working capital as a strategic component of its business. This must be an organisational strategy and not a reactive approach.

In the current economic climate, unbankable SMEs will be hit hardest. Many among them will need financial assistance, but will not qualify because they will be considered financially unviable or unbankable. This downturn should be a wake-up call for SME owners to set their sights on getting their finances in order, rather than simply focusing on where the next loan is coming from. It will serve them better over the long term.

The author is the Founder and Managing Director of Finaqe Group, a Singapore-based independent funding intermediary firm dedicated to bridging the gap for companies to access capital.