In Singapore, small and medium-sized enterprises (SMEs) are pivotal in driving innovation, job creation, and economic growth. SMEs make up 99% of all local businesses and employ up to 71% of the workforce, according to the Department of Statistics in Singapore.
While many of these SMEs are in the service industry, a significant number of entrepreneurs choose to build capital-intensive businesses for the more tangible output they provide.
These include enterprises in the construction, real estate, manufacturing, and agritech sectors, all strong contributors to Singapore’s economy.
As of 2021, the construction sector alone contributed over 20% to Singapore’s Gross Domestic Product (GDP), while manufacturing accounted for approximately 3% of the country’s overall economy. The agriculture sector, on the other hand, fills a gap in Singapore’s food supply chain and helps ensure food security for the nation-state.
For all the benefits these businesses provide, entrepreneurs who venture into capital-intensive industries also face unique challenges.
Capital-intensive businesses often need to invest in advanced technologies, modern infrastructure, and skilled labour. Many face persistent cash flow and funding challenges. This is especially true if the business model is unconventional and seen as risky by traditional financial institutions.
How can these capital-hungry enterprises create sustainable financing amidst market volatility and periodic shifts in demand?
The promise and problems of capital-intensive business: Agritech as a case in point
To better understand the challenges capital-intensive industries face, let’s look at the agritech sector.
This area has several innovative startups, thanks in part to funding and support from the Singapore government. Sky Urban Solutions developed Sky Greens, the world’s first hydraulic-driven vertical farm. World Paradise Farms’ (WPF) created an aquaponics system, which provides fish and leafy vegetables to Singaporeans.
Government grants help these businesses in the early stages, but they often need additional funding to sustain growth. For instance, WPF’s co-founder, Sunny Chin, aimed to develop an indoor garden system that relies on big data and AI to streamline and optimise farming. This called for investment in sensors and Internet of Things (IoT) devices, IT infrastructure, and data analytics talent.
Like many capital-intensive businesses, the biggest challenge with agritech is profitability. Singapore is the second in the world when it comes to food affordability, besting even agritech stalwart the Netherlands. Low food prices are driven in part by Singapore consumers being among the most price-sensitive in the region. Few Singaporeans will pay a premium for their agri-products, even if they are of higher quality.
This means agritech companies need to work with very thin margins to remain price-competitive. The consequence for their businesses is tighter cash flow and a limited ability to scale.
This tight cash flow inevitably affects funding. Traditional lenders mostly expect SMEs to show good profitability before extending loans. In Singapore, up to 86% of SMEs struggle to secure funding from traditional sources. Reasons range from a lack of collateral to rigid lending criteria — all of which are applicable to capital-intensive SMEs.
The time factor for capital-intensive businesses
The other challenge that agritech businesses face is the time lag between investment and returns. Plants need time to grow, and they need to be constantly watered, fertilised, and kept pest-free until harvest. There is a period of waiting before the business can convert capital outlays into revenue.
A similar pattern exists for other capital-intensive industries like construction and wholesale trade.
Construction companies often start with a large cash outlay on equipment and materials whose value depreciates over time. Business owners need to put a lot of money out even before a project begins. And even when they’ve already won contracts, the projects often span long periods and get delayed due to factors like weather conditions, labour shortages, or regulatory hurdles.
These delays can lead to increased costs and hinder cash flow, making it even harder for SMEs in this industry to maintain a stable financial position.
Likewise, wholesale trade companies need to put cash out before getting cash in. Wholesalers maintain a large inventory of goods to meet fluctuating market demands. They rent or buy warehousing facilities, as well as logistics and transportation equipment or services. And it’s rare that inventory gets moved out of warehouses as soon as they arrive. This ties up capital in stocks that are waiting to be sold.
And after products are sent to clients, many buyers ask for payment terms that let them settle their bills 30 or even 60 days after delivery.
Cash flow becomes even tighter when SMEs have to accept extended payment terms from clients, even while not enjoying the same benefits as buyers themselves.
In a survey of SME financing in Southeast Asia, we at Funding Societies found that only 23% of Singapore-based respondents reported getting favourable credit terms from suppliers. Close to half of respondents (49%) said they never had the privilege to pay on credit terms at all, forcing them to have funds ready prior to purchase. This means cash goes out fast to pay for supplies, but cash from completed deliveries or projects comes in slower.
Unfortunately, late payments are a constant in these SME sectors. A 2022 study found that construction and agri-food sectors in Singapore averaged payment terms of 29 and 39 days respectively, but businesses actually collected those payments within 46 and 58 days respectively.
Innovative SME financing options to manage cash flow
In the absence of traditional bank loans, capital-intensive businesses need to find alternative sources of funding.
Startups can seek out venture capital or offer private equity to new investors. Government grants can also help fill the gap and provide additional support. Nowadays, FinTech platforms offer micro-loans and business financing instruments that can help SMEs manage their cash flow better.
To invest in equipment, SMEs can explore forging strategic partnerships and collaborations with technology providers or equipment manufacturers. Businesses can gain access to cutting-edge machinery and tools in exchange for providing input into the manufacturer’s research and development, to help refine the latter’s product offerings.
Alternatively, SME owners may seek out equipment leasing companies that offer flexible terms and maintenance services. Leasing arrangements can help startup entrepreneurs manage their cash flow more efficiently.
For wholesale traders, partnering with technology providers can facilitate the adoption of digital solutions to streamline inventory management, thereby enhancing overall efficiency.
Sometimes, business financing options like micro loans and term loans can also help ease the cash flow of capital-intensive SMEs. Depending on your chosen financing platform, these loans may be unsecured (not requiring collateral) or offer longer repayment periods. This enables companies to undertake large-scale projects, invest in inventory, and address infrastructure needs while maintaining a manageable debt burden.
Another way to overcome cash flow issues is through Accounts Receivable (AR) financing. AR financing enables businesses to gain access to funds before invoices are collected, helping loosen cash flow and enabling investment into growth initiatives. Through AR financing, capital-intensive companies can avoid cash flow crunches and improve liquidity while waiting for revenue to come in.
By working with FinTech partners like Funding Societies to secure AR Financing, capital-intensive SMEs can be in a better position to contribute to Singapore’s thriving economy.
Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation. In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorised third party.
Accounts Receivable Financing is fulfilled either by Funding Societies Pte Ltd, or FS Capital Pte Ltd (in partnership with Enterprise Singapore), depending on the customer profile.
- Pioneer to Leader: Meet Vikas Jain, FSMK’s First Employee - September 26, 2023
- Harvesting Opportunities: Innovations in Financing Capital-intensive Startups - August 22, 2023
- Enhancing Business Cash Flow through Accounts Receivable Financing - August 17, 2023