Opening access to capital: Driving connections between small businesses and banks

All businesses, big and small, need capital to grow. Positive cash flow means businesses have the time and flexibility to invest in their sustainable growth, for example hiring and training staff, buying better equipment and implementing new technologies.

But when you’re a small business, startup or entrepreneur, financing options are often limited. If your business is less than two years old, it can be particularly difficult to successfully access capital. The 2016 DP Information Group SME Development Survey showed that 22% of Singaporean SMEs cited the cost of financing as a key issue affecting their business.

In February this year, MAS announced a new piece of regulation that relaxed the restrictions around unsecured SME financing and there are a number of key government backed initiatives driving easier SME access to capital. But there are still hurdles. Banks offer the cheapest financing options for small businesses, but the applications process can be drawn out and complicated.

Banks are required to make sure an average of 97 - 99% of their small business loans are successful, i.e. not default, according to Linkflow Capital. Because of this, banks have a stringent assessment process. With limited access to a small business’s financial history, and no foresight of its prospects, many banks cannot take the risk and therefore have to deny the loan application.

There are options to access capital through other financial institutions, and these are often cheaper as these lenders strive to compete with the banks. Unfortunately, aside from being stricter in their assessment, they often require collateral to underwrite the loan.

Singapore’s SMEs can also turn to niche third party lenders, but these often have much higher repayment charges.

How technology can help SMEs access capital

SME access to capital is therefore largely dependent on banks having access to all of the credit information to make a fair and informed assessment.

The traditional loan application process involves an often lengthy and inefficient process including manual reconciliation of data between platforms and printing out copies of PDF documents to provide the bank. The bank then makes a lending decision based on an SME’s backdated financials, with little insight into its longer term prospects.

At Xero, we have launched integrated direct bank feeds for small businesses in Asia with leading banks including DBS, UOB, HSBC and CIMB and there are more partnerships in the pipeline. Direct bank feeds give small businesses the option to connect their online bank accounts to their Xero cloud accounting platform. This automates the flow of their bank statement data into their accounting platform, saving them hours of manual bank data reconciliation with the click of a button.

Giving small businesses the option to connect their banking data with their accounting software also opens up opportunities for easier lending. Enabling their transaction data to flow securely and automatically into Xero each day eliminates the hassle and costly mistakes caused by outdated cash flow balances and human error.

Direct bank feeds ensure that an SME have clean, high integrity data to share in with their potential lender when the time comes to apply for a loan.

As the technology continues to develop, rather than printing out documents for their loan application, SMEs will have the choice to let the bank connect to their Xero account for full visibility of their up-to-date, accurate, consolidated financial information for the specific purpose only of providing the supporting information for a loan application.

This will give the bank a truer overview of the financial position of the small business and where it’s headed, which can help to facilitate the loan application process and its success. This significantly decreases the risk that the lender will deny a loan because they have insufficient financial information about the business and allows the lender to make a faster decision. And for a peace of mind, the entire process is entirely automated and entirely secure. The small business owner is in complete control of sharing their financial information, both with whom and when.

- Alex Campbell, Managing Director, Asia, Xero -