Changing the game for SME and startup financing

1. What do you think was the most remarkable thing that happened this week?

The own-goals of the Trump administration continue to provide grist for the journalistic mill. The latest snafus include the sudden resignation this week of President Donald Trump's National Security Advisor Michael Flynn and the withdrawal of Mr Trump's nominee for Labor Secretary, the equally controversial Andrew Puzder. Elsewhere, the Greek government is, for the umpteenth time, going head to head with its eurozone creditors to obtain another slice of bailout money. Then, on Monday, there was the shocking and mysterious murder by poison at Kuala Lumpur airport of the half-brother of North Korean leader Kim Jong-un. All of the above are worthy of further comment and speculation.

But the big local news came from the Monetary Authority of Singapore (MAS). Hot on the heels of the report of the Committee on the Future Economy (CFE) released last week, the MAS rolled out a flurry of initiatives to boost financing options for small and medium enterprises (SMEs) and to make it easier for venture capital (VC) funds to set up and operate in Singapore by, among other measures, removing minimum capital requirements.

2. Why is this a big deal?

At least on paper, these initiatives have the potential to be game-changers for the financing of SMEs, both within Singapore and in the region. They could also expand the VC presence in Singapore, which could both benefit local startups and give Singapore a shot at becoming a regional hub for venture capital.

Singapore's 190,000 SMEs are vital to the economy. They make up 99 per cent of the businesses in Singapore and employ about two thirds of the workforce, but account for only about half of total value added and they lack scale.

Under the proposed new rules, finance companies can provide collateral-free loans of up to S$550 million to SMEs, subject to certain limits, but still far more than the maximum of S$5,000 permitted at present. This will enable these companies to tap a bigger pool of capital and expand operations, including in larger markets outside Singapore, for which they will need more financing. SMEs from other countries looking to expand in the region could tap Singapore's capital markets as well.

The new rules also permit foreign takeovers of finance companies. This would enable these companies to also get bigger and gain access to new business models and credit assessment skills. Not surprisingly, their share prices jumped - as much as 35 per cent - after the MAS announcement. The MAS also said that it would develop an electronic marketplace for trade finance, which will enable companies to shop online for trade financing deals. This could make Singapore a regional hub for this activity as well.

The new rules exempting VCs from capital requirements mean that these entities would be treated differently from fund managers, which is appropriate.

After all, VCs deal only with sophisticated investors, invest in unlisted companies and don't manage public funds. Lower set-up and compliance costs will attract more VCs - including smaller ones - to establish in Singapore. This should boost the VC industry (which has welcomed the new rules) as well as help more startups.

Singapore has a lot of startups, but it also has too many unviable startups. More VCs will lead to more pools of "smart money" as well as expertise on the management of early-stage companies, which will help more startups become viable and hopefully grow and go global. Startups from the region could also benefit from Singapore's VC ecosystem. This is already happening, but it could now happen on a bigger scale.

In short, MAS is setting the stage for Singapore to become a regional financing hub for both SMEs and startups. If it works out, that could be quite a big deal.

3. Did you see it coming?

Some of these measures have been in the works for a while. The Singapore Business Federation has long lobbied for more financing options for SMEs. And last November, Deputy Prime Minister Tharman Shanmugaratnam indicated that the MAS was looking to simplify and shorten the process for authorising VC managers. However, MAS did well to announce these moves together, and so soon after the CFE, which gives them greater visibility and impact.

4. Should anyone be worried? Excited, maybe?

The MAS moves are positive for all concerned: finance companies and SMEs as well as VCs and startups. However, we need to see how effective the measures prove to be in practice. For example, it remains to be seen how much collateral-free lending the finance companies actually do. This is not something they are geared up for. They will need to raise their credit assessment standards - perhaps with the help of fintech firms and greater use of data analytics. In overseas markets - if they go there - issues relating to accounts receivables and loan foreclosures can also be tricky. As for SMEs, to scale up, internationalise and become globally competitive, they will need more than financing. They will also need access to skills and technology as well as greater risk appetite.

VCs are important, but they are only a part of the startup ecosystem, which also needs more incubators and accelerators (which provide vital mentoring services and "reality checks" to startups before VCs come into the picture), as well as more exit options for entrepreneurs, such as listing platforms for earlier stage companies - which might also be in the works.

5. What happens now?

The MAS has launched a public consultation exercise on the proposed changes to VC authorisation. After the feedback, we could see the final changes put into practice. The changes relating to SME financing are likely to go into effect later this year.