Alternative Finance to Help Tide Over Rough Waters

By Vihang Patel

A pandemic of epic proportions has long been forecast, but the enormity of challenges stemming from the COVID-19 outbreak has taken the world by shock. Singapore is no exception.

Singaporean businesses have been hit hard as output and consumption have both been hit, and their difficulties have been compounded by the essential raft of measures taken by the government to try and stall the spread of the virus. Singapore’s “circuit breaker” has put in place strict restrictions on the movement of people—either for work or otherwise—and requires all businesses barring a small section that have been classified as providing “essential services” to have their employees work from home.

The activities of several small and medium enterprises (SMEs) have virtually come to a standstill as a result. This is a challenge for Singapore, as SMEs form the backbone of economic activity here, comprising 99 per cent of the 273,100 business enterprises, and employing 72 per cent of the 3.5 million strong workforce.

And things are likely to get tougher, with the Ministry of Trade and Industry expecting Singapore’s economy to contract by between 1% and 4% in 2020.


The Impact on SME Operations

Although Singaporean SMEs technically have access to formal banking facilities, actually obtaining funding to tide over liquidity crunches remains a considerable challenge. This results in a dearth of financing for both long-term investments as well as working capital requirements, and greatly inhibits their growth. For obvious reasons, the alternative financing landscape has become widely popular in recent years, as SMEs have been willing to turn to any models of financing that can help them meet their requirements.

They have become even more important in the current backdrop. While the Singapore government has also announced relief measures for enterprises in the form of wage coverage and credit support, a host of overhead expenses have to be met and the support available is not sufficient. Considering revenues are negligible if not non-existent, SMEs will face serious challenges in securing working capital even when normalcy returns.

SMEs lack credit history, and many traditional banks are not ready to risk financing new business ideas that are untested and whose credit worthiness cannot be determined. This gap will be an impediment to small business survival in this uncertain economic climate. It will be accompanied by a threat to numerous livelihoods too considering this segment employs the bulk of the working population. Without access to funding, SMEs already struggle with day-to-day working capital requirements and are also constrained in their ability to make long-term investments. With the implications of COVID-19 thrown into the mix, the struggles will compound.


The Wind in SMEs’ Sails

Across Southeast Asia, the size of the alternative lending market has grown substantially in the past few years, as fintech has enabled easy access to micro loans, low borrowing requirements and borrowing without collateral. This has helped SMEs meet their funding requirements when other avenues have been out of reach.

In the current context, when even banks are going to be strained—having offered moratoriums on various repayments—alternative lenders are going to play a pivotal role in meeting the SME segment’s financing needs. This is going to be the case especially after the tide turns, as banks will be cautious with lending while things return to normalcy, and will likely have more stringent requirements before lending.

In light of the present situation, lenders must seek to move to alternate financing models, leveraging digital platforms. A quick migration to a digital model could be facilitated by partnering with data-driven alternate lending companies, some of which are already supporting banks in expanding their alternative lending footprint across the region. A digital model will also allow banks to better assess borrowers’ creditworthiness. In this regard, various tools using AI and big data are being employed such as using information available from payments and transaction data.

Few fintech companies are also using traditional and non-traditional data points for credit scoring, creating a reliable credit narrative for previously unbanked SMEs. These measures will also underscore their attempts to engage in quality business during such times by ascertaining the viability of businesses they are going to extend financial support to.

One key advantage offered by alternative lenders is the ability—and willingness—to process smaller loans quickly and cost-effectively. This could well be the ‘make-or-break’ factor for several SMEs in the current situation. In other words, many of the benefits that alternative finance offers are more pronounced now.


Current Scenario

In Singapore, the government has introduced several initiatives and financing schemes to assist enterprises with their capital and credit requirements through a support package of $60 billion announced in the annual budget and two supplementary budgets. The thrust of the support package is to help enterprise overcome immediate challenges, help them pay for their employees and to strengthen economic and social resilience more broadly.

As part of the Jobs Support Scheme announced in the package, the government will co-fund 75% of wages (capped at S$4,600) for all local employees in April. Starting in May, it will co-pay 50% of wages in the food services sector and 75% for companies in the aviation and tourism sectors, while businesses in all other sectors will have 25% of wages covered by the government.

Separately, rental waivers will be granted for up to three months for stall owners in centres managed by the National Environment Agency; for two months for selected government agency tenants; and for a month for several other tenants of the government agencies.

The support package also makes provisions for larger sums of credit to be more easily available to enterprises to help them tide over their cash flow problems, and provides various levels of property tax waivers for different kinds of commercial properties.

While these measures are extensive, they may still not help some enterprises—such as many food and beverage (F&B) outlets, ‘mom and pop’ stores, and other small businesses—that will be most impacted by the new circuit breaker regulations.

Take the example of the food and beverages sector in Singapore. According to the Restaurant Association of Singapore, stating that if the current situation doesn’t improve and if additional support is not provided in terms of rental and manpower costs, 80% of restaurants in Singapore outlets are likely to face closure in the next month.

In cases such as these, alternative finance is well-positioned to provide support to existing clients in addition to measures being taken by financial institutions and the government to support enterprises. It is, therefore, important for SMEs to diversify their sources of funding beyond traditional lenders so they can also benefit from the nimbleness and speed of alternative finance companies’ loan disbursals.


What the Future Holds

The impacts of COVID-19 will, however, likely hasten the pace of reform in the SME financing sector, ushering in changes that would otherwise have taken far longer to come about. In addition, collaborations between banks and fintechs could also pick up pace. Prior to the COVID-19 outbreak, banks were already setting up smaller, segment-focused subsidiaries to cater to the specific needs of SMEs.

On their part, SMEs must use this opportunity to become more capital-efficient. Even after we see the back of COVID-19, its impacts on business and our economy will linger. The recovery in consumption could take up to a year, and it is important for SMEs to manage their finances well between now and when things recover. This will entail diversifying their working capital sources, building a credit history with lenders and learning to effectively use working capital finance to manage their businesses, such as through the use of tools like invoice financing. There are several tools for SMEs to choose from, but advance planning and adoption are key.

The Singapore government’s initiatives, coupled with the support that from banks and alternative lenders, will go a long way in assuaging concerns around the health of our SMEs, and will hopefully help them come stronger on the other side of COVID-19.

The author is the co-founder and CEO of Finaxar, a Singapore-based fintech firm focused on changing the way small business financing is done using technology.