(^16) COVER STORY
SME FINANCING THROUGH BANKS
The bulk of SME loans are still provided
by banks and financial institutions. This is
because banks are able to provide the cheapest
interest rate to the SMEs who are eligible to
borrow from them. Banks’ cost of lending is
cheaper, and they have access to deep pockets
to create a financing and transactional solution
that meets SMEs’ needs and helps them grow,
even across borders.
For a long time, banks have been
reluctant to lend to SMEs due to their
comparatively high risk and small size.
However, consumer products have become
highly competitive and margins from large
corporate business have also dropped.
Therefore, in recent years, banks
in the region have expanded their SME
offerings significantly, as well as establishing
dedicated SME financing divisions. As the
banking landscape has changed, banks have
been forced to diversify their lending base
and find new customers.
As a result, the SME banking space is
extremely competitive. Most major retail
banks offer SME loans with differing credit
criteria, interest rates, and loan conditions, so
it pays for SMEs to shop around to find one
that can best meet their needs. According to
the ASEAN SME Transformation Study by
UOB, EY and Dun & Bradstreet, the most
important factor for small businesses when it
comes to picking their financial partner is the
competitiveness of the bank's pricing and fees.
Coming in a close second is the time
taken for banks to process transactions.
Therefore, banks are investing in technology
like AI and data analysis to shorten the
time it takes to approve loans. For example,
Singapore’s UOB has developed a data
analytics-powered credit underwriting engine
to halve the time that it takes to process
loan requests, while Malaysia’s CIMB Bank
is embracing “digital and innovation-led”
solutions to make banking simpler and faster
for SMEs.
Banks are also coming up with technology
solutions alongside their loan products, both
to assist SMEs as well as to differentiate their
products in the market. DBS Bank started
its DBS TechMatch initiative in 2016 to help
SMEs embark on innovation projects to solve
business problems and build capabilities. On
the other hand, Hong Leong Bank introduced
its Digital Business Solutions suite in 2018,
with four e-tools that allow the bank’s
SME customers to conduct key back office
administrative and marketing functions easily.
TAPPING INTO CAPITAL MARKETS
As mentioned, an overwhelming amount
of SME financing comes from banks. But
the landscape is diversifying. The financial
crisis of 2007-2008 revealed that bank financing is not a reliable source of financing, especially
during periods of systemic stress. Moreover, regulatory measures taken after the crisis, such as
strengthened rules on capital requirements, create additional challenges on the financing of SMEs
through bank loans.
The capital markets have stepped in to partially alleviate that gap. In 2007, the Singapore
Exchange launched Catalist, as a platform for SMEs to tap into the capital markets and hopefully
make the jump to the Main Board. Similarly, in 2017, Bursa Malaysia introduced the Leading
Entrepreneur Accelerator Platform (LEAP) market.
These platforms serve as an alternative platform for SMEs to raise funding and gain access
to capital markets. For SMEs, equity markets present an opportunity to raise funds without going
through traditional debt financing. Depending on the situation, equity financing may prove to be
a more suitable option for raising funds for SMEs. This is especially so for smaller SMEs who may
not have sufficient assets to be pledged for debt financing.
CONVENTIONAL SME FINANCING
STARTUP FUNDING
STARTUP FUNDING
OWN RESOURCES,
RETAINED PROFITS
VENTURE CAPITAL,
GOVERNMENT GRANTS
BANK LOANS,
TRADE CREDIT,
HIRE PURCHASING
NON-TRADITIONAL
LENDERS (E.G. ALIPAY),
P2P FINANCING
QUALIFIED MARKETS,
CAPITAL MARKETS
EQUITY CROWDFUNDING,
PRIVATE EQUITY
DEBT FINANCING
DEBT FINANCING
EQUITY FINANCING
EQUITY FINANCING
ALTERNATIVE SME FINANCING
romina
(Romina)
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