DESPITE efforts made by the government to provide more financing options for entrepreneurs in the past several years, few small and medium-sized enterprises (SMEs) actually use them - and more still prefer to look to banks for funding sources.
In the SME Development Survey 2008 report, only 7 per cent of SMEs said that they have benefited from one or more government-funded financing schemes, down from 10 per cent last year, and 8 per cent in 2006.
The survey was conducted in the first half of this year by DP Information Group, Spring Singapore and IE Singapore. It took into account inputs from more than 1,600 SMEs here across 10 sectors.
Although the response was solicited before banks started turning cautious toward SMEs in the second half of the year, it highlighted a need for more efforts to make government programmes known.
Barry Lee, audit partner at KPMG LLP, believed that the wide array of options offered by multiple agencies may make it seem too mind-boggling for SME owners or leaders to bother.
'These are people who believe that they should be out there bringing in the revenue - the decision makers,' said Mr Lee. 'And having to go through many multiple points of contact and going through the criteria of these schemes is perhaps a little bit too troublesome at the end of the day.'
Too much trouble
James Chua, owner of Applied Micro Tech Pte Ltd, is one such entrepreneur. He recalled an incident a few years ago when, after discussions with two government agencies, found the application procedure too time consuming.
'There was a lot of talk . . . but in the end, it was too much trouble in terms of documentation and justification,' he said. 'Might as well come up with our own pockets, it's faster.'
Singapore Management University's associate professor of management Tan Wee Liang added that findings may not accurately reflect the interest level. There may be SMEs who have applied for government-supported financing schemes but have been turned down.
'Government incentive financing programmes are purpose-driven,' he said. 'The availability of such financing is tied to the objectives of the programmes. The government's restrictions on availability could be a factor. Hence SMEs requiring working capital, revolving credit or ready cash for business use would turn to banks and financial institutions.
'Some government support is provided for upgrading and expansion of business operations or micro-loans. The programmes may require collateral which the SMEs may have already committed to other creditors. Alternatively, they require the SMEs to have good order books or growing, which are conditions that are onerous in a downturn.'
As such, banks continue to be the main financing channel, with term loans being the most popular source. About 41 per cent of the respondents this year said that they used term loans, down from 47 per cent last year. This was followed by trade financing (36 per cent) and overdraft (32 per cent), which were also the second and third most popular choices last year with respectively 29 per cent and 32 per cent of respondents saying that they have obtained those types of external financing.
'Term loans have traditionally been a popular form of financing for companies large and small as they offer more favourable interest rates,' said DP Info managing director Chen Yew Nah. 'In terms of borrowing costs, the interest charged on term loans is generally lower than that charged on revolving credit facilities . . . Therefore, term loans make cash flow planning more predictable. When you commit to that loan, you won't need to worry about the unpredictability of reviews and readjustments.'
Ms Chen reckoned that the low take-up rate of government-supported financing schemes was also a reflection of the robust growth in the economy in the last three years. 'When SMEs have a selection of options available to them from commercial financial institutions, government funding is required less,' she said. 'This is especially true in times when the economy is strong.'
Among those who have tapped government funding schemes, the Local Enterprise Finance Scheme (LEFS) was the most sought after, with 53 per cent of them using it. Administered by participating financial institutions, the programme allows companies to borrow up to $15 million, with the government sharing a proportion of the default risk.
Companies that look to government schemes also like to tap microloan (28 per cent) and the loan insurance scheme (11 per cent). These, together with the LEFS, are among the programmes that were recently enhanced by the government in a $2.3 billion credit access package to SMEs.
With credit tightening conditions and banks subjecting loan applications to closer scrutiny recently, the proportion of SMEs tapping into government-aided funding is expected to go up next year.
'We anticipate more SMEs will consider the government funding schemes, particularly the off-budget measures,' said Ms Chen. 'However, for maximum effectiveness, we strongly encourage a more in-depth examination of the funding needs of each unique sector. We would also encourage the banks to be more discerning in evaluating applications from different sectors, rather than taking a one-size-fits-all approach.'
About 62 per cent of the respondents cited working capital use as the purpose for new financing, while 37 per cent said that they required it for overseas expansion. Although SMEs loan appetite appeared to have increased in the last three years, DP Info's Ms Chen expected the trend to turn over the next two years. In the same survey, the ratio of SMEs taking up more than $500,000 in bank loans rose to 59 per cent this year, from 55 per cent last year and 53 per cent in 2006.
More conservative
'SMEs will definitely be more conservative with their borrowings during the next two years,' said Ms Chen. 'Most SMEs will try to conserve their financial resources to ride out the recession. Financing is driven by needs, and needs in turn are driven by the volume of transactions, so SMEs will have less financial needs stemming from growth pressures. However, many will look to refinance their existing loan portfolios.
'SMEs with increasing liquidity and good cash flow may choose not to borrow at all, preferring to manage their cash flow better and to push for improved operational efficiency.'
When asked to list the top three areas which they hope financial institutions can improve on, 60 per cent of the respondents said that it would be competitive interest rate pricing. Another 24 per cent said better customer relationship management, and a further 24 per cent asked for simpler documentation in loan applications.
'We encourage the banks to take this opportunity to look at each industry sector on its merits, rather than making evaluations across the whole spectrum of SMEs,' said Ms Chen. 'Each sector has different challenges with respect to their financing and if both the banks and the government examine and understand each sector in greater depth, we believe that interest rates charged could reflect a company's credit rating.
'This would show that the banks understand the individual needs of their SME customers and is a clear display of better customer relationship management.'
This article was first published in The Business Times on December 16, 2008.
The survey was conducted in the first half of this year by DP Information Group, Spring Singapore and IE Singapore. It took into account inputs from more than 1,600 SMEs here across 10 sectors.
