Every small and medium enterprise (SME) needs funding at certain milestones to grow and scale up. While bootstrapping could be an option, the fact is that most business endeavours will require some sort of external financing. More often than not, the first option an SME would turn to will be a traditional financing provider.
Except, there may be a problem in this scenario. Not all funding is made equal. Long-term loans from traditional financial institutions are undoubtedly helpful for significant undertakings, such as strategic expansion to a foreign market. Still, they are not always the best option for SMEs.
For example, SMEs that only need short-term cash injections to fuel their operations would benefit more from alternative financing options. These include an invoice, purchase order financing, and crowdfunding, which is much faster and more flexible than the available offers from the traditional lending market scene.
With so many options available, it is not surprising that many, if not most, of the SMEs, are unaware of the alternatives. Therefore, by learning more about the various options, SMEs can be empowered to choose the best working capital financing option that will best suit their funding needs, goals, and financial position.
Business financing models
First, we will discuss the two main types of business financing: equity funding and debt funding.
Equity funding is what a lot of people would be familiar with if they watch Shark Tank. It’s financing in exchange for equity or partial ownership of your business. Its main benefit for company owners is that it dilutes risk—in the event a business fails, founders don’t necessarily need to pay out (unless expressly stated in terms of the agreement).
The drawback, though, is that founders lose control over some parts of their business. Investors typically demand a stake in the company—sometimes even majority ownership—in exchange for their risk in investing.
Sources of equity funding include venture capitalists, angel investors, the entrepreneur’s friends, family, and public members who invest through equity crowdfunding.
Debt funding, on the other hand, is the more common and well-known form of business financing. It involves a loan that business owners need to pay back over time and with interest. While no equity needs to be shelled out, a loan is essentially debt and may take its toll on businesses over time.
Sources of debt funding include banks and alternative lending platforms.
The problem with traditional financing
While there is a wide range of external financing options in the market today, most SMEs still turn to banks as their critical financing facility. Few qualify, though—some estimates show that 81 per cent of SMEs in Singapore would fail to meet the requirements for a bank loan.
And even if an SME did manage to get approved, the whole process of applying tends to be paper-based and time-consuming, making it infeasible for urgent loans.
Second, traditional business loans often come in more significant amounts and with longer terms. These conditions aren’t suitable for SMEs that need just enough funds to manage their cash flow.
Short-term financing can address some of the most common cash flow problems experienced by SMEs in Singapore. Among the finance-related issues, the top cause was a delay in client payments.
That means that SMEs need better access to the funds they need—a challenge efficiently addressed with working capital financing.
The case for working capital finance in Singapore
Working capital financing is a small, short-term loan that can be paid back in as little as four months. It’s usually easier to obtain and offers more flexible terms than those given by traditional lenders.
This type of financing is ideal for businesses with irregular business cycles or seasonal inventory buildups.
An online greeting card vendor, for example, might find a spike in sales during the holidays but require additional financing to purchase raw materials in advance or hire additional designers on a contract. Working capital financing can help cover those expenses until the revenue starts pouring in.
It’s the same concept for those SMEs that suffer late payments from clients. While they wait for their clients to fulfil their invoices, working capital financing can cover regular expenses and day-to-day operations in the meantime.
This kind of funding gives SMEs the flexibility to remain agile in uncertain economic times and also allows them to recover and maintain operations during seasons when cash is short.
Alternative sources of business financing
In Singapore, SMEs have several alternative financing options:
1. Government-assisted schemes
In Singapore, fortunately, SMEs have found sweet relief from the local government and banks. Amidst these trying times, financial institutions have stepped up to offer government-backed loans at a lower interest rate; the government has introduced a plethora of schemes and grants to boost working capital and prolong small companies’ runways.
2. Alternative financing options
Alternative business funding platforms like Validus have been steadily gaining traction over the past few years. Operating in a credible, well-regulated jurisdiction, such as the Monetary Authority of Singapore (MAS), these platforms connect businesses to accredited and institutional investors, giving SMEs an alternative cash flow lifeline on top of traditional financiers. Specialising in zero-collateral, short-term financing under 48 hours, it operates using a pay-as-you-use model allowing SMEs to take up a loan whenever needed without being locked into a long-term contract.
One of the most popular products is invoice financing. SMEs don’t need to wait for clients to fulfil their payments—they can receive them immediately.
New SME customers who financed their first invoice with Validus can take advantage of the current zero disbursement fee promotion.
The proper funding at the right time
As the saying goes, it takes money to make money, and the truth is, maintaining a business is not cheap. There will always be a time where your business will require a boost in finances to get ahead. With expensive loans and a lack of financing options now a thing of the past, SMEs can have their pick. Alternative financing options are much more affordable, quicker, and accessible.
With the alternative financing options available in the market, loans are more accessible now than ever, giving more SMEs the chance to survive a financial crunch or grow and expand their operations.
SMEs may also use our working capital loan calculator to find out what your monthly repayments will look like at different interest rates, and then get a simple, sample repayment schedule emailed to you. For a more accurate and customised quote, do get in touch below so we can advise you accordingly.
To get started, your business must be registered on ACRA, with an operating history of at least 2 years and must not be a sole proprietorship or LLC.
To get a working capital loan of up to $100,000 within 24 hours, you only need to send in 2 documents*, and complete KYC assessment
- Credit Bureau Statement (past 1 month) of Personal Guarantor(s)
- Bank Statements (past 6 months)
*Required application documents may vary based on the financing request and are subject to change by Validus