Alternative financing can be an option in bad times

FINANCIAL concerns are a worry for many of Singapore’s small and medium enterprises (SMEs), particularly when it comes to cashflow.

This has been compounded by recent macroeconomic challenges, not least rising costs. Inflation was named as the top challenge by over half of the Singapore SMEs surveyed in the most recent Global Business Monitor survey by Bibby Financial Services.

Although Singapore’s inflation rates are on a downward trend, after peaking in late 2022, price levels remain elevated with headline inflation at 4 per cent in August.

To make things worse, the growth outlook is subdued. In August, Singapore’s official growth forecast range was narrowed to between 0.5 per cent and 1.5 per cent, from an earlier expected range of 0.5 per cent to 2.5 per cent.

These broad macroeconomic headwinds have also brought specific firm-level challenges for SMEs. In the same survey, close to three-fifths of respondents noted an increasing number of unpaid invoices.

This represents a disruption to cashflow, which could limit growth – or, at worst, be fatal for businesses. In the survey, two-fifths of respondents also said they had suffered a bad debt in the last 12 months.

This worrying payments picture is corroborated by data from the Singapore Commercial Credit Bureau. In the first half of 2023, prompt payments declined and slow payments – that is, when less than 50 per cent of total bills are paid within the agreed terms – rose.

Although payment performance overall improved in the third quarter, payment delays continue to worsen in the important sectors of manufacturing and wholesale.

Bridging the gap

Businesses could turn to banks to help bridge their cashflow gap. But amid economic uncertainty, continued inflationary pressures, and shifting credit appetites, traditional loans have become harder to secure and tougher to manage, especially for SMEs.

In addition, a large portion of SMEs do not fall within the targeted lending strategies of traditional banks, in which financial and operational track records are considered when approving a loan.

This focus on past records can overlook the potential and innovative capabilities of newer SMEs, potentially leaving many underserved.

All this means that there is a need for alternative financing to keep more vulnerable SMEs afloat during turbulent times.

One long-running option is that of factoring, which includes invoice factoring. Such arrangements – and the companies that offer them – have been around for decades, but their relevance as a source of alternative financing has grown in today’s credit environment.

In invoice factoring, a factoring company buys another company’s unpaid invoices at a discounted rate. This represents a lifeline for SMEs, as they can receive much-needed cash without waiting for clients to pay up.

As SMEs no longer need to chase their clients for payment, invoice factoring also frees up time for them to focus on their core operations instead. Such flexibility and immediacy are the advantages of factoring.

Other alternative financing options for Singapore’s SMEs include peer-to-peer lending platforms, crowdfunding initiatives, or even merchant cash advances, where businesses receive an upfront sum of cash in exchange for a portion of future sales. These options can also be tailored to cater to specific business needs.

Funding growth

Beyond providing urgently needed cash, alternative financing companies can be seen as growth partners, with the amount of funding obtained being scaled as the business grows. In other words, alternative financing models can adapt to provide access to funds without the need for SMEs to repeatedly apply for loans.

Apart from helping SMEs get through bad times, alternative financing can also help them to power their growth. These funding sources can be tapped for investment purposes too – particularly important as SMEs look to stay ahead of digital trends and shifts in the market.

In Bibby’s survey, 28 per cent of respondents said that they lacked the cash flow required to grow. As for why they needed funding, 40 per cent said it was chiefly for domestic growth and expansion, while another 29 per cent said it was for international growth and expansion.

Tough times are ahead and more headwinds are expected. To navigate this, SMEs need to adapt strategically, stay informed, and use the right tools and platforms.

This includes understanding and deploying the right mix of alternative financing options, as needed, to keep cash flow stable and ensure sustainable growth. Tough times don’t last; resilient SMEs, with the right support partners, do.

The writer is managing director for Singapore and South-east Asia at Bibby Financial Services