Taking the right approach to financing for SMEs

Do SMEs face an uphill battle trying to secure working capital - or is it actually less difficult than commonly believed? Gene Wong, Managing Director for SME Banking at DBS Bank, answers these questions.

Gene Wong, Managing Director and Country Head of Business Banking, DBS

Why are SMEs cautious or hesitant about borrowing for their businesses?

It is partly because of the overall business environment right now. We are not completely out of the woods, but we can be cautiously optimistic. SMEs feel uncertain about the short-term prospects, and uncertainty causes reluctance to invest in their business growth, like taking on big contracts and other risks.

There are many factors causing uncertainty. The rising inflation affects the cost of operations and undermines profit margins. Manpower is another problem: it is not easy these days to generate the headcount necessary to operate at pre-pandemic capacity; being short-handed will inevitably inhibit operations and expansion plans.

Given these challenges, most SMEs might prefer to focus on stabilising with a more cautious approach and forgo opportunities for growth in the short term.

Why do you think SMEs prefer to borrow from family and friends or use their personal savings for their businesses?

A recent survey found that many SMEs prioritised sourcing capital from family and personal savings first, with borrowing from banks or financial institutions being third on the list.

This is not necessarily a bad thing; “bootstrapping[1]”, or using personal savings to fund one’s company, can be an appropriate source of funding at a company’s very early stages, if the company is still figuring out their business model, or when pivoting from one business plan to another – often, the financials of the company may not be as stable as it could be. At the same time, some may also prefer to focus on business operations.

That being said, SMEs that have built a solid business model and have demonstrated a good run rate[2] can – and should – look into selectively investing in growth, as the next step in building their business.

Why should SMEs invest in their own growth, despite their doubts?

At a certain point, excessive caution can be counterproductive to businesses. While they can minimise risk by not investing in growth – that leaves them at a lower growth trajectory and unable to access opportunities available to their faster-growing competitors.

If SMEs only have a single product or service line, they will also be more vulnerable to unpredictable events like sudden supply chain disruptions and future pandemics. On the contrary, expanding to multiple business lines can simultaneously crisis-proof businesses: diversifying their business while also increasing revenue streams.

To fund the next stage of growth, SMEs can source additional working capital through DBS Working Capital Finance; apply for an Equipment Financing Loan or Commercial Property Loan to purchase specific assets; or, for loans exceeding S$300,000, seek approval for a DBS Business Term Loan or for easy financing options, check the SME Financing Toolkit page.

However, growth does not only refer to business expansion; it can also refer to building a strong business foundation. To that end, DBS IDEAL offers intelligent and intuitive business banking for SMEs. It lets businesses access digital banking and cash management tools all from a single dashboard; from checking account balances, giving payment approvals, and paying salaries and suppliers.

SMEs who want to streamline their business accounting operations further can connect their DBS bank account to Xero and set up a daily bank feed for automatic reconciliation. Xero and DBS customers can enjoy a seamless journey with the connection now also available in DBS’ Online Loans Application Form. This collaboration allows for greater data integration so they can easily access more financing options.

Is it true that SMEs have a hard time getting approvals for financing?

Contrary to that, if businesses can prove that their financials work, the chance of securing bank financing is actually quite high.

In the wake of the pandemic, government-assisted loan schemes have been developed to support SMEs. The Singapore government takes a higher risk-sharing percentage in these schemes, enabling the banks to absorb more risk and lend to a broader segment of the SME population.

In DBS’s case, we used this period to study SME borrowers that we previously did not lend to due to lack of data or credit history. The bank now has a lot more data from these groups of clients, which allow us to develop more robust scoring models. This has allowed the bank to service more SMEs, even those with a thinner credit history than the bank’s traditional clients.

I’ve only been approved for a lower loan amount than I need. What can I do to raise the amount I’m eligible for?

SMEs should not be discouraged by a low approved loan amount. They should look at it as only the first conversation in a long relationship with the bank. The more an SME actually transacts and works with DBS, the more data the bank can collect on their business, increasing the likelihood of continuing the relationship in a productive way for everyone involved.

SMEs can explore different products more suitable for their current collateral standing. They can try other types of loans, like overdrafts and working capital term loans.

A smaller quantum may not be what they wanted, but it still lets them accomplish short-term goals, like fulfilling a short-term contract.

Even with a smaller quantum, businesses should still strive to maintain a good repayment track record. As they build their business using the working capital we lend them, our predictive models will evaluate this new data and possibly offer loan top-ups to continue supporting the company's business, based on their improved financial position.

DBS frequently engages their loan customers, above and beyond what other lenders usually do. They might check whether your business plans call for another financial product; they will offer their help on next steps, whether it is purchasing property or a need for trade lines to facilitate expansion.

Data is used to build a holistic cycle: with more transactions, we can see the improvements happening in the bottom line. This gives opportunity to engage with SMEs at the right timing with more financial products that suit their stage of growth.

What tips can SMEs owners follow to increase the chances of getting their financing approved?

DBS takes a holistic view of the borrower: from the clients they service, to their financial habits. The entire business model and portfolio are being evaluated, not just the financials, to establish a pattern of transactions that show the borrower’s repayment capability, business model, and ability to support the desired financing level.

SMEs should present the most updated financials possible to increase their chances of getting their loan approved. In fact, showing more information than less is advantageous for them. Some parts of the data can paint a more complete picture; for instance, if their financials are six months stale, then other information – like existing bank statements, or contracts with companies they are dealing with – can fill in the details the bank is looking for.

Most importantly, borrowers should not fudge the data: SMEs may be tempted to show only their best numbers and hide the less desirable parts, but that will only work against them.

At the end of the day, SMEs are at the heart of everything we do. By placing your business first, we strive to make banking simple so that you can focus on your business.

Explore our guide in getting a term loan for your SME.

[1] Investopedia, What Is Bootstrapping? What It Means and How It's Used in Investing, November 2020.

[2] Investopedia, Run Rate: Definition, How It Works, and Risks With Using It, July 2022.