Financial education vital for SMEs to stay afloat amid and beyond the Covid-19 outbreak

Government support is helpful, but firms should know all financing options available to them.

THE financial impact of the Covid-19 outbreak has been massive and is only set to burgeon - with businesses across sectors taking a hit to their chins and many already starting to run into cash-flow difficulties. Whilst companies tussle to keep the lights on during this period, small and medium enterprises (SMEs), in particular, will require an additional leg-up to stay afloat. This is evident from the increase in business loan demands issued by banks since March, exceeding $490m to over 1,200 companies .

Unlike large corporates that have the reserves or capital to keep them going through crises, SMEs don’t have the luxury of a war chest. Nonetheless, there are multiple forms of financing that can provide these companies with the capital they need. To make an informed decision, more education on the various debt financing options is imperative.

According to a report by the Asian Development Bank, the economic impact of Covid-19 will range from US$77b to US$347b, or 0.1 to 0.4% of global gross domestic product .

Singapore is projected to be adversely affected from the fallout, with growth slipping by over 1 percentage point in 2020, a Reuters poll of economists revealed . A port city and a major trade partner with China, Singapore is forecast to contract 0.6% in the January to March quarter of this year, a first since the 2009 recession after the global financial crisis. In light of the Circuit Breaker extension, economists have further downgraded the country’s Gross Domestic Product (GDP) forecast whilst expecting a deeper recession .

Support available for Singapore SMEs
Whilst the outlook may be bleak, the Singapore government has made clear that it will do all that is necessary to help workers and companies hit hard by this global health crisis back on their feet. At Budget 2020, Deputy Prime Minister Heng Swee Keat unveiled a series of support measures and gave his word that Singapore would rebound from the Covid-19 outbreak. “Never fear,” he said.

Among the support measures announced at Budget 2020 is the enhanced Enterprise Financing Scheme’s Working Capital Loan programme, under which Singapore enterprises can get easier access to working capital. Most recently, in an effort to lower the cost of lending for businesses, the Monetary Authority of Singapore (MAS) has also launched the MAS SGD Facility for Enterprise Singapore (ESG) Loans to lend Singapore dollars at 0.1% interest per annum to eligible financial institutions. Around 2,500 loan applications amount to SGD1.9 billion have been made by SMEs since the beginning of March , revealing their dire need for capital.

However, as constructive as government schemes sound, they tend to be one-size-fits-all and may not be able to cater to specific pain points faced by all kinds of SMEs. SMEs can look to a whole slew of other financing instruments. And whilst doing so, the key factors every SME should consider are their stage of business and purpose of financing.

Financing lessons from COVID-19
Take growth-stage companies: young firms that are trying to keep their business afloat during these difficult times will need working capital financing to sustain regular overhead costs such as wages and rent, thereby reinforcing the need for working capital financing.

There are several good sources of working capital financing that companies can possibly tap on to recover post-Covid-19, which include traditional ones such as a bank loan, and non-traditional ones such as invoice financing or venture debt. More often than not, the latter group better caters to SMEs’ financing needs.

Other than banks, businesses can possibly look to alternate solution financing providers to fulfil their capital needs. According to the Economic Survey of Singapore 2019 by Ministry of Trade and Industry, non-bank lending grew by 11% in 2019 . This is a significant pickup from the growth of 3.2% from 2018, indicating that businesses are more aware of such providers. More avenues such as crowdfunding and peer-to-peer platforms are now possible avenues for capital with the increasing awareness of the financing challenges that SMEs face. Given the increased choices, SMEs are faced with the challenge of finding the best possible solution suited for their companies and needs.

Invoice financing that we provide, for instance, is an affordable, non-cumbersome solution that is great for SMEs which require a capital injection for a short period of time. It allows SMEs to sell their accounts receivable (invoices) to a third party at a discount of their value. This means the company gets paid early and can receive up to 80% of its invoice amount, enabling it to bridge or increase cash flow that might otherwise be trapped in unpaid invoices due to payment terms or delayed payments. This solution is one that companies can tap on during good economic times as well.

Venture debt, on the other hand, is a form of debt financing for equity-backed companies that do not have the assets or cash flow for traditional debt financing, or that desire greater flexibility. Venture debt is generally a complement to equity financing and structured as a term loan with warrants for company stock. It is a popular tool as it reduces the founder or investor dilution whilstallowing the company to receive the capital needed to grow. As a recovery tool, it can help extend the company’s runway.

The road ahead
Recessions are bound to occur, either as the result of an economic cyclical downturn, a financial crisis, or an unprecedented event such as the Covid-19 outbreak. This downturn is unlike the others; happening at a short notice coupled with a sudden steep decline in revenue. Companies are struggling to pivot and rethink their business models to mitigate the impacts of the crisis.

Regardless, companies need to prepare themselves as best they can for the corresponding widespread decline in economic activity and spending, which typically lasts for more than a few months.
SMEs have to ensure their operations can continue during a recession, for which they will require capital. Whilst governments will step in to provide a lift to those affected, the onus is on all businesses to make the effort to research the financing landscape and understand the diverse options that can help them ride out the downturn. The rule of thumb is that different situations call for different approaches. Even if companies have reserves, it may be prudent for them to also use debt financing to get the capital they need. Whilst companies are focused on surviving and riding out this crisis, business owners have to plan for recovery that may happen three to four months later. At the end of the day, companies that know how to leverage and optimise different financing sources to keep going during bad times are the ones that will prevail.

A financial crisis takes no prisoners. Businesses are going to be impacted, though some industries may emerge more unscathed than others. But it is companies that make the most informed choices in the situations they are given that will come out ahead. And it’s not necessarily the large corporates.