Alternative Finance for SMEs: How it Solves Credit Crunch

In this article, we are exploring the impact of credit crunch and analysing how alternative finance for SMEs could be the solution

Impact of a credit crunch

During a Credit crunch some of SMEs’ customers may delay settling their debts or extending their credit terms.  The reasons for such actions lie in the believe that the longer the company holds onto its cash, they will be better able to cope with the prevailing financial environment.  This includes:

• Reacting faster with advantageous opportunities, for example, cheap raw material
• Precautionary action, building a stronger balance sheet with funds to service any unforeseen eventualities.
• A vicious cycle where their own customers may delay payments thus affecting their cash flow.

When business climate is negative, SMEs are the first to have to bite the bullet.  This includes accepting longer payment terms or increase in late payment.  In Singapore, 41.5% outstanding invoices are overdue with DSO averaging of 47 days.  That means, on average, SMEs will have to wait for 47 days before they receive the payment.

To obtain working capital, SMEs usually reach out for loans or overdraft facilities from traditional lenders like Banks. However, many are rejected due to new stringent requirements that banks have imposed on the SMEs during this poor business cycle.  A recent survey of 3,600 SMEs by the Singapore Business Federation and DP Information Group found that these firms are less confident about being able to obtain funding in the next six months.

Alternative Finance for SMEs – Solution

In recent years, many alternative forms of finance has emerged to provide a solution to SMEs lack of funding problem.  Many SMEs are turning toward these alternative sources of finance, such as crowdfunding platforms.

Some pointers for SMEs considering Alternative financing

1. Pick the right platform: assess what type of funding you need and what tenure you require the funds for. Peer to peer lending will be more suitable for a larger and with a longer lending term usually exceeding 1 year.  Peer to peer invoice trading will be more suitable for smaller sums and with a shorter lending term as an alternative finance for SMEs.

2. Don’t ask for more than you need: It is easily tempting to seek more funds than you actually need.  However, it is most prudent to obtain the working capital that is just sufficient for your needs and repay on time.  By building a good credit history, SMEs will benefit getting t better rates and more options in the longer run

3. Be prepared: Don’t leave it to the last moment to seek funds.  Seek out the best suited platforms and get registered.

It is expected that the growth in alternative finance for SMEs will be exponential in years to come.  Such platforms have proven to be able to bridge in an efficient and cost effective way the funding gaps for SMEs.  Thus sustaining their ability to  grow their business and attain affordable financing.

Reference

Yasmine Yahya, “SME business woes made worse by credit crunch”, The Straits Times, November 11, 2015