SME Business Financing: The Definitive Guide (2020)

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SME Business Financing Guide:

Founders and business owners have various ways to finance their SME business, including equity
and debt financing. The latter option of debt financing for SMEs is comparatively more common and easier to apply for.

How should I finance my Small Medium Enterprise (SME)?

Before deciding which SME financing option to go for, let’s define the available options and
explore their characteristics. Debt financing, commonly referred to as just loans, refers to the
instance where the borrower (SME) accepts funds from an external source and promises to
repay the principal debt plus interest. The interest in this case can be deemed as the “cost” to
borrow the fund.

As for equity financing, it essentially means that you as the SME owner sells a
stake in your company to investors for immediate cash. Equity financing is costly and relatively
difficult to execute hence it is not a viable option for many SMEs.

Read more: Debt Vs Equity Crowdfunding

What is Equity Financing

This financing method requires the sale of a certain stake in your company to angel investors and
venture capital in exchange for cash. The funding can then be used for business expenses and to
pursue new projects. Equity financing is usually undertaken by start-ups in tech industries with focus on scale and growth.

Angel Investors/Venture Capital

Angel investors are individuals who are able to provide any funds in return for equity or convertible
debt. Venture capital refers to institutions or firms that engage in the same activities as angel
investors. Both venture capital and angel investors often offer value-added strategic advantage to
companies by offering access to their own networks of partners and investments.
However, by engaging angel investors and venture capital, you will be giving up part of your control over the business.
Additionally, you will have responsibility and be held accountable for the business decisions to external parties.

What Debt Financing options are available for SMEs?

In our guide, we list down the advantages and disadvantages of the top 5 types of SME debt
financing facilities as well as where to apply for the SME financing you require. Each of these
options will fit different requirements, hence it is important to consider the impact, eligibility and
processing time to know what financing option is best suited for your SME!

Option 1. Government-Backed SME Grants and Loans

As of 1 April 2018, SME grants are provided by Enterprise Singapore, the result of the merger
between International Enterprise Singapore and SPRING. Government loans provided by Enterprise
Singapore for SMEs include Temporary Bridging Loan and various loans in Enterprise Financial
Schemes for different stages of growth. With 99% of enterprises in Singapore consisting of SMEs,
the Government has been increasing grants availability and loan options to better support the local businesses.

Recently the Government had announced consecutive support schemes for SMEs designed to
combat the CoVid-19 economic downturn. Meanwhile, a grant acts as a vote of confidence for
your business’ growth by the government and approval of the grant will raise your creditworthiness for
future loan applications with financial institutions.

The main drawback of government grants and loans is, therefore, the difficulty of having your grant
and loans approved. Government grants are much tougher to obtain in comparison to accessing
financing via other financial institutions as they are more stringent with the approval criteria while
government loans will take a longer period to review and disburse. There are many grants that work
on a reimbursement basis and may not be a feasible option if your project or company requires cash
upfront or time sensitive.

Option 2. Bank Loans for SMEs

A study by Visa and Deloitte found that as many as 40% of SMEs in Singapore do not have access
to bank loans financing despite local SMEs contributing 47% of the country’s GDP.
There are a few reasons for this situation: in certain market conditions, banks have
a low appetite for risk. Lack of credit information on SMEs raises the cost of the
credit-risk assessment for the banks to provide lower interest rates.

Most often, SMEs are unable to provide collateral for the loan applications. The
aforementioned reasons resulted in a sizable undeserved gap of SMEs in need of financing yet
rejected by banks due to insufficient information and/or collateral.

While banks provide longer tenors for their loans, the application and disbursement process tend to
be lengthy and include complicated loops which SMEs might have difficulty navigating. Fortunately
with the rise of FinTech firms in Singapore, they were able to partner with and complement the
banks’ loan offerings. One such example is Funding Societies, a digital financing platform who
partners local banks to better support SMEs. Local banks refer SMEs to Funding Societies for debt
crowdfunding and additional loan financing options.

Option 3. Crowdfunding and Peer-to-Peer Lending Platforms

Crowdfunding and peer-to-peer lending are relatively new forms of alternative financing in Southeast
Asia. In recent years the financing option has gained much traction, especially in Indonesia.
Crowdfunding generally refers to the funding of a creative project or business by a number of
backers via digital technology. Often, backers are given rewards as an incentive to donate.

Peer-to-peer lending is an offshoot of crowdfunding. It works by matching investors and SME
borrowers through an online platform. Borrowers take up a loan for their business while investors
who had collectively funded these loans earn interest in return.

There are great advantages to Peer-to-Peer lending – its process is comparatively easy, fast and
straightforward, which makes it a great alternative for SMEs compared to bank loans. With Funding
Societies, we have successfully crowdfunded many loan products as well as providing micro loan
options for quick bridging funds.

Option 4. Credit Advances

There are some conventional alternatives to banks and government loans. You can borrow money
on credit cards, take on a personal loan or take a personal mortgage on your residential property.
While not a favored option, SME owners may consider these options due to the urgency of the fund requirement.

Overdrafts are immediate while personal loans can be approved in the matter of hours.
However, these means of financing come with their own risks as credit card and personal credit
interest rates are relatively high and could snowball if not managed well. With home mortgage, the
risk looms that you may lose your property if things go wrong.

Each option explored above has their own advantages and drawbacks, consider your business
situation and requirements to make the best choice for your circumstances.

Funding Societies offer flexible, short term and customised business financing options that can be
personalised to fit your business needs. With Digital Financing, applications can be done online and
processed as quick as 5 working days!

sme business financing guide


Chapter 5: Factors to Consider When Applying for Business Loans
Chapter 6: Peer-To-Peer Loans And Why You Should Consider Them

In need of funds? Check your eligibility now!

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