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KNOWLEDGE
15 January 2021

Alternative Lending for SME Financing in Singapore



Financial industry has been going through a lot of turbulence in the recent past, such as the 2008 global recession leading to financial crisis, disruptions due to technological development and now the pandemic which has affected all. This has forced many enterprises to relook at how the operations were being done earlier and the dependence on usual sources available for running their businesses. People are looking at different ways of tackling the unpredictable situations and how to move ahead with the resources available. They are trying to find avenues for sustainable growth and hence looking at alternate financing options available to them.

What is Alternative Lending?

As the name suggests, it is an alternate way of providing lending to businesses other than the usual way of getting loans from the Banks. It refers to all the non-bank options that are available for small businesses, such as non banking financial institutions, online lending, crowdfunding, etc. These are mostly private players that are ready to provide loans inplace of banks. Due to the strict conditions of the banks to provide loans, such as credit history, documents, lengthy application process, and long time for approvals, many businesses are looking at alternative ways of procuring funding.

Alternative Lenders and Loans in Singapore

As the emerging platforms are getting more recognition, many new entrants are joining in and providing more options for SME Financing. These lenders are usually not under strict regulations from the authorities as compared to the banks. This makes it more imperative for SMEs to be cautious about the platforms they are dealing with and understand the new offerings in detail.

Types of Lenders: There are different types of players in the market that can provide loans:

  • Direct Private Lenders: They use their own money to issue loans, inplace of using depositors or investors money.
  • Crowdfunding platforms: They offer borrowers a place to raise small amounts of money from a large number of individual or institutional investors..


Types of Loans: There are different types of loan facilities that can be provided based on your needs.

  • Revolving Lines of credit: It is a fixed amount of money that is extended to a borrower. You can draw from the line of credit up to the fixed amount, paying interest on the amount borrowed.
  • Business Installment loans: It is a lump sum of money given to a borrower, which is repaid at regular intervals until the principal and interest is paid off. It is mostly used for general business needs. The loan amount can range from lower than S$50k to S$500k or higher.
  • Merchant Cash Advances: It is upfront cash given in exchange for future credit card sales. The borrower pays back through a percentage of their daily credit card revenue.
  • Invoice factoring: It is a type of financing in which a business sells its outstanding accounts receivable to a third party at a slight discount. The fee is charged as a percentage of the invoice amount.
  • Bridging loans: It is a short-term loan backed by an asset. These loans are short-term and usually take less than a year to repay.
  • Equipment financing: This loan is used to purchase the equipment for business needs to operate. It relies on the equipment as a collateral.


Why is Alternative Lending growing rapidly in Singapore?

Singapore is known to be the Financial hub of Asia with numerous banks and their diverse services available to all. But still when it comes to small business financing many SMEs face problems due to the rules & regulations and the stringent terms of granting loans. Banks require a good credit history to provide loans which leaves the new start ups stranded. Even the established businesses find it difficult at times if they are in need for small amounts of loans for their immediate needs. Due to the financial crisis the Banks were a little hesitant in extending loans to many small businesses. That is when the emergence of alternative lending started picking up.

It has been growing since last 5 years as it led to the transition by providing quick access digitally and bringing in new softwares to develop the online platform. With the regulated framework and stress on technological advancement by the government, many businesses are considering making use of the fast and easy way of procuring funds online. All this has led to a significant growth in the industry.

Alternative Lending for Small & Medium Business

When your business is at a growth stage, your own resources would fall short at some point and you would be in a need of external help either from banks or look at alternate sources. You can consider alternative lending even if you are just starting out or have a low credit score. You can evaluate the options available based on your needs. The comparison is available online between multiple lenders available with their offerings, so you have all the information you need to make the best decision for your business.

Covid times solution:

It becomes even more important during the Covid times to evaluate the resources available to you. The Banks are pulling back due to the economic downturn and many businesses closing down. They do not want to take the extra risk by financing them. Only a small number of SMEs obtained Temporary Bridging Loan (TBL) from various Financial Institutions whereas most SMEs are still looking for funding for survival. Due to banking credit policies, they do not approve the entire amount needed, so most SMEs are not getting the sufficient funding. After obtaining maximum TBL If SMEs want to apply for further financing from banks, they will be restricted either due to the Total Loan Exposure or the Debt Servicing Ratio. They will be eligible for additional loans only when they have reduced the current outstanding or the debt repayments to the required limit. SMEs will benefit if they diversify their financing facility with multiple lenders as it will help them to build additional track records and explore more financing offers as small or new lenders are more willing to customise financing solutions according to their needs.

Pros & Cons of Alternative Lending

This medium of Lending is fast growing and gaining popularity. This contributes to many factors like easy access and variety available to choose from. Hence, you must compare the multiple lenders you are going to partner with and select from them according to your needs. You should carefully understand the terms and conditions, the reliability and any hidden cost. There are many advantages and disadvantages of dealing with them.

Pros:

  • Simple Application Process: The process is not as lengthy as that of banks. With new softwares and online platforms the process can be completed in a few simple steps without having the need to visit them.
  • Fast Turnaround Time: The time for approval of loans can be as short as 1 day whereas the usual time taken by banks could be as long as one month. This has become possible as the platforms already have technology in place to verify your credentials instantly with bank statements and Myinfo through government tie up.
  • Flexible Terms: They are able to provide more flexible terms as per your needs as online platforms make it easy for borrowers to compare between the multiple lenders for the best rates, terms, maturity dates, etc.
  • Less Stringent Requirements: There is not much paperwork as required by the Banks. Most of the information is already available with them. Other than the credit history they also look at the future plans and the account receivables of the small businesses as they can offer smaller loan amounts with lower risk.
  • No Collateral: Even if your business has no assets to keep as security and not approved by banks due to low credit rating, you can still avail funding for your business from these alternative options.


Cons:

  • Higher interest rates: Due to the fact that they are taking higher risk as compared to banks in terms of granting loans with lower requirements, it results in slightly higher interest rates.
  • Short duration loans: They can offer flexible terms for different amounts of loans and usually prefer short duration repayments to cover their risk profile if they offer for low credit rating or no collateral loans.
  • Small loan amount: Usually to keep away from the risk of non payment incase the business closes down, they provide small amounts of loans.


Online Platform for Alternative Lending

The Banks usually prefer large corporations for loan funding as they cause less financial risk. With the upward trends of start ups, many small companies were in need of loans to run their businesses. Initially, when these startups and SMEs were rejected loans from banks they would go for Crowdfunding to source lending for their business operations. But with evolving technology and the establishment of online lending platforms, many new options have opened up for Alternative lending. The digital transformation has made it very easy for the borrowers to transact online through the different stages from Application process to Verification to Approvals and Finally getting Funding.

It has become a seamless process with a one stop solution providing faster and easier access to SME Financing. Those who are not too tech savvy also have the facility to take help of the online consultants available as partners on the platform who can guide them through the process. The online platforms help to match the borrowers and the lenders with the best terms available for both the parties.

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