The total credit gap for both formal and informal SMEs globally is around US$2.6 trillion, according to the World Bank. While the gap is larger in emerging economies, Singapore isn’t exempt from this problem, as most SMEs in the country have difficulty accessing traditional sources of funds, such as bank loans.
In fact, finance-related issues are among the biggest woes of SMEs in Singapore, as revealed in the 2018 SME Development Survey. SMEs are facing higher interest rates for bank loans and are failing to provide enough collateral financing — all while dealing with tighter credit access from suppliers and higher instances of delayed payments from customers.
All these issues pose risks for businesses’ cash flow and inhibit their growth. That’s a major problem for Singapore’s economy, which relies on SMEs for 49 percent of total enterprise value-add and 65 percent of employment.
Breaking down barriers for SMEs through fintech
Fortunately, the country’s tech sector is flourishing with innovation, including the area of fintech. As ASEAN’s financial hub, Singapore has led the region in fintech development to improve financial inclusion, thanks to a mix of a healthy startup system and support from both banks and the government.
These innovations are breaking down financial barriers for SMEs by providing them access to alternative funding solutions, as well as improving their chances of securing traditional financing through financial analytics and automated accounting.
Providing access to alternative finance
Online platforms can connect investors to SME borrowers, so the latter can access funds while the former get rewarded by modest interest. This model, called peer-to-peer (P2P) lending, isn’t new. However, Fintech platforms have transformed it by making it more transparent, efficient, and safe. Thus, they gained approval from the Monetary Authority of Singapore (MAS).
When performed online, P2P lending can be regulated, as borrowers and investors do not transact in-person or directly with each other. They go through the fintech platform, which provides clear rules and limits, such as establishing interest rates and loan terms, regulated by MAS.
As an alternative to traditional sources of funding, P2P lending increases SMEs’ access to financing by providing lower barriers to entry. While an SME may need to present collateral and books that show several years of profitable operations to secure a bank loan, neither is a requirement for many P2P lending platforms.
Reducing loan processing time
When working with fintech platforms, borrowers can access funds faster as they don’t need to negotiate with individual lenders. If they meet the requirements and standards of the lending platform, they get access to the funds. They need not undergo a long and tedious process of face-to-face meetings and complicated documentation.
Fintech platforms can process loan applications within short periods largely due to the use of financial analytics. These analytics functions can assess a company’s financial history and determine its credit risk. This allows them to gain a more accurate picture of an SME’s financial health and ability to pay back the loan.
Improving cash flow management
Beyond financing, there are a myriad of fintech solutions for banking, bookkeeping, and accounting. When used together, these tools can tremendously improve cash flow management in a business.
Cloud-based accounting tools, for instance, grant businesses visibility into their accounts in real time, using any device. Interfaces call APIs allow this software to connect with other apps, such as bank feeds and e-commerce platforms, to automate the updating of accounts.
This means business owners will know at any time, exactly how much cash they have, how much they owe, and how much they expect to spend and receive at the end of the month. Knowing the company’s financial position is crucial in making business decisions. This includes entering new markets, taking out loans, granting credit to a customer, and developing new products or services. It also helps businesses prepare loan applications more quickly and with less room for error.
Speeding up payment collection
A survey by DP Information Group in December 2018 revealed that a third of SMEs faced external finance-related challengers, of which 84 percent of SMEs faced payment delays from customers. This is a major handicap that constricts cash flow and impedes growth.
But there’s a silver lining. E-invoicing has been found to accelerate payment cycles, and this is part of the reason why the Government has implemented a nationwide, inter-operable e-invoicing framework. Apart from automating the preparation, exchange, and processing of invoices, e-invoicing also reduces errors that cause further delay in payments.
Making data-driven business decisions
Financial analytics can give businesses insights into their financial health. It can help them spot market trends, determine return on investment, identify areas for potential savings, and prepare financial forecasts for the upcoming months and year. It can reveal anomalies in data, helping businesses perform financial audits, investigate issues, and detect fraud.
As mentioned above, analytics also helps lending platforms analyse a potential borrower’s financial history and health. This way, they can reduce the risk of non-payment and maintain the viability of the alternative finance industry.
Financial inclusion through fintech
At a time when tech giants are being scrutinised for privacy breaches and accused of corporate greed, it’s good to see that the industry also cares for the smaller guys. The segments of society such as SMEs that have been unserved or underserved by traditional financial institutions will find a partner in fintech firms, almost all of whom aim to improve financial inclusion and reduce barriers to growth and success.
In summary, fintech is building a better financial infrastructure and offering solutions and improvements to long-standing challenges. To have long-term, sustainable and inclusive growth, the industry needs to adhere to best practices and cultivate trust.
Different sectors need to work together to grow and strengthen this infrastructure and truly make an impact on society. MAS has implemented a fintech regulatory sandbox to encourage innovation while promoting responsible operations. The sandbox places safeguards for companies that are developing and testing fintech solutions, as well as for their customers. Meanwhile, the Singapore Fintech Association holds an annual fintech festival, drawing together industry players from different countries, especially around Southeast Asia.
With a vibrant ecosystem, policymakers, regulators, and innovators can work together to create a robust fintech industry that truly promotes financial inclusion.
Sonal Jain | Chief Data Officer | Validus
Sonal brings over 14 years of experience in analytics and risk management in the payments and lending space across Asia-Pacific and Europe.
Prior to joining Validus, Sonal led the development of next-generation big data solutions at American Express, optimising the company’s marketing strategy, campaigns and modeling needs.
Sonal holds a Master of Arts in Economics from the Delhi School of Economics, University of Delhi. She also has a Postgraduate Diploma in Marketing from the Chartered Institute of Marketing, United Kingdom.