In Singapore, small and medium-sized enterprises (SMEs) are struggling to secure sufficient financing from traditional lenders, with most still largely relying on their personal networks to support their business, findings from a new study by cloud banking startup Mambu show.

The Small Business, Big Growth report draws on results of a survey of 1,000+ SME owners globally who set up their company and applied for a business loan in the last five years.

The study, which sought to understand SMEs’ most pressing challenges, found that SMEs in Singapore face an uphill struggle when it comes to securing financing.

In the last five years, 86% of Singaporean SMEs surveyed indicated being unable to secure any or sufficient funding to cover the needs of their business, on at least one occasion, citing weak cash flow (36%), strenuous collateral requirements (34%), an arduous application process (29%), rigid lending criteria (29%) and rejection due to a lack of a business plan (29%), as their greatest barriers to funding.

Instead, SME owners are turning to their friends and family to help launch and support their business. In Singapore, funds from friends and family (39%), as well as personal funds (39%) were found to be the top funding sources, followed by funding from business partners (34%). Only 29% of respondents indicated having successfully secured financing from a traditional bank or building society.

Despite playing a major role in most economies, SMEs and micro enterprises have traditionally been ignored by big banks due to the lack of credit data and perceived risk.

The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of US$5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. East Asia and Pacific accounts for the largest share (46%) of the total global MSME finance gap.

The rise of alternative lenders

To address SMEs’ unmet finance needs, alternative lenders and new fintech players have entered the market over the past couple of years, leveraging data and technological advances to create new ways of credit assessment and plug the gap.

In Southeast Asia, Funding Societies operates one of the region’s largest SME digital financing and debt investment platforms, recording more than S$3.37 billion in loan amount funded across Singapore, Indonesia, Malaysia and Thailand. Funding Societies specializes in short-term financing for SMEs, funded by individuals and institutional investors.

Validus is another major Singaporean digital lender, providing a SME financing platform for small businesses and accredited investors. Using data analytics, artificial intelligence (AI) and machine learning (ML), Validus focuses on underserved SMEs in Indonesia, Thailand and Vietnam, and has funded S$2 billion worth of loans so far.

In Indonesia, SME finance platform KoinWorks assists e-commerce vendors, social commerce sellers and freelancers in starting and growing their businesses. The startup provides a variety of products for them to access loans and increase productivity, including incorporated SME neobanking services, working capital, factoring, early wage access (EWA) and fund management. KoinWorks claims 1.5 million customers.

Data from the Cambridge Centre for Alternative Finance (CCAF) show that the SME alternative financing industry has maintained its dynamism these past couple of years, despite a significant drop between 2017 and 2018 due to the crackdown on the alternative finance sector in China.

Alternative Finance Volumes Attributed to Business Fundraisers, 2015-2020 USD, Source: The 2nd Global Alternative Finance Market Benchmarking Report, Cambridge Centre for Alternative Finance

These new players are putting increasing pressure on incumbents who are struggling to address changing customer behaviors and expectations around speed, efficiency and digital experience.

Almost all of the SMEs polled my Mambu in Singapore (97%) said they would consider switching lenders if a competitor offered a better or improved offering. Among the top three reasons for switching lenders, Singaporean SMEs cited better digital services (47%), better borrowing benefits and incentives (43%) and better in-store services (40%).

In the application process, Singaporean SMEs said they were most interested in automatic credit review and collection (86%), faster loan decision processing (81%), tailored offers and services (80%), more flexible loan conditions (80%), and low or no collateral requirements for loans (80%).

Read the full report Small businesses, big growth here:

Featured image credit: Edited from Freepik and Unslpash