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The Business Times

Funding SMEs in global ventures

MINDY TAN looks at how local banks can help small and medium enterprises overcome the obstacle of financing as they expand overseas

WHILE small and medium enterprises (SMEs) are increasingly aware of, and willing to attempt overseas expansion, many obstacles still stand in their way.

Beyond the issues faced by any other organisation - including manpower and understanding the local market - a lack of funding continues to be a key factor hindering SMEs in their expansion ambitions.

While sources of funding for SMEs have grown in the last few years, Tan Chor Sen, OCBC's head of emerging business, points out that gaps remain, particularly for organisations seeking to venture overseas.

While he acknowledges that more financial institutions have started focusing on SMEs, particularly in the last five to six years, there are still gaps in the market.

'Singapore is an open economy, and it's quite normal for established and bigger companies to go to China or Indonesia. But in recent years, you also start to see smaller companies wanting to go overseas.

'I'm not saying financing (for overseas expansion) isn't available at the moment, but it's sporadic. This segment of the market is growing (and) financing is one thing they are looking for,' notes Mr Tan.

In addition, young enterprises often face difficulties in securing 'growth loans', especially if they have been around for less than three years.

Recognising that the emerging business segment, defined at OCBC as businesses with turnover of $10 million or less, is largely under-served, OCBC was the first bank in Singapore to set up a dedicated team focusing on the needs of this segment in 2005.

They have since invested more than $20 million, with the aim of delivering product and service innovations to help small businesses launch the next phase of their growth.

Being an early entrant has served them well. The bank says it is, to date, the largest small business bank, serving one in two businesses in Singapore; it has doubled its customer base in the enterprise banking segment over the last five years. The bank was the first in the industry to extend loans to one-year-old businesses in 2010.

'Rather than be somebody who's there to provide a service, our view is that we're there as a stakeholder, and part of the eco system to make it more vibrant,' says Mr Tan. 'If we lend money earlier, businesses have a greater chance of succeeding, and also succeeding faster.'

There is, arguably, a calculated risk involved, given that a significant number of businesses fail in their first three years. Mr Tan estimates that in the first year alone, between 25 per cent and 30 per cent of businesses typically go dormant, while in the third year, about 40 per cent to 50 per cent of companies go dormant.

It is also important to profile each business, given that the number of active businesses can range between 180,000 and 220,000, of which 93 per cent to 95 per cent will have a turnover of $10 million or less, says Mr Tan.

'These companies can be 30 to 40 years old, or be as young as those born today. Requirements for young companies are very different from those of stable companies. Requirements for companies with a small turnover is also very different from those with a larger turnover.'

It is thus important to understand the business, he says. 'The question is, do we have to take on more risk? I think the answer is no, because we understand the business,' says Mr Tan.

'Our understanding of the small businesses, which comes with working with them for the last six to seven years, has given us the confidence to lend to them,' he says. 'We take the time and effort to truly understand their business and stay abreast of issues relevant to the industry they are in, so that we can make informed credit decisions and better support their business goals.'

It is for this reason that OCBC feels confident in tackling the gap which overseas loans presents. 'Younger and smaller companies are beginning to go out earlier. It's an evolving trend, and we feel it's something worth supporting,' he says.

'Supporting them as they go overseas is another level of endorsement. To say we'll give you your first loan is a sign of commitment to the relationship. It's a further endorsement to say that if you want to go overseas, and you qualify (for the loan), we will give it to you.'

'(For companies with turnover of above $10 million), we have industry experts...We know that in the life cycle, not everything is the same, and that's why different services are provided to engage you,' he adds.

In an industry first, OCBC opened a full-service business banking centre in the Ubi-Paya Lebar area in 2008; the second was opened in Jurong last year.

'Local knowledge is important,' says Mr Tan, of the bankers located at the business banking centres. 'They are also more experienced bankers, and they handle fewer customers so they are able to engage their customers more.'

'Having someone to front (these SME customers) is important because as you know somebody better, you're more prepared to extend a higher loan quantum. Also, the relationship is more stable.'

Having that level of engagement with stakeholders also allows the bank to gain deeper insight into the community, notes Mr Tan.

'We are investing in these insights and engaging closely with the SME community because we know (the community) is not static. You need to keep yourself relevant by engaging them, knowing the insights, and filling in as gaps evolve,' he says.

DBS is another local bank that has pitched innovative concepts in a bid to gain market share in the SME segment. In July last year, the bank targeted start-ups by offering heavy subsidies for their business insurance, a first in the industry. Part of the DBS Entrepreneur's Account for Start-Ups, the programme also waived several banking transaction fees.

Another unique service in DBS's stable includes QuickCollect, which allows customers to drop off cheques, trade documents, and remittance applications at DBS's mobile van.

Says a DBS spokesman: 'Currently, DBS Enterprise Banking is the only bank in Singapore that offers the full range of commercial cards for all customer segments from start-ups to large corporates. These include the debit card, credit card and charge card as well as the World Business Card which is packed with more privileges for selected Enterprise Banking customers.'

UOB, meanwhile, has a dedicated unit to serve the needs of SMEs with an annual turnover of no larger than $20 million.

The LEFS (Local Enterprise Finance Scheme) Micro Loan Scheme, for instance, is designed to help small companies (10 or fewer employees, or organisations with annual sales not exceeding $1 million) gain access to funding which can be used for purchasing equipment, or meeting working capital requirements.

Beyond commercial loans, UOB is also a participating financial institution offering low-cost government assistance schemes, including the Internationalisation Finance Scheme, administered by IE Singapore.

More light needs to be shed on the SME segment, and in particular, emerging enterprises, says OCBC's Mr Tan, who credits the Emerging Enterprise awards as a powerful platform for emerging enterprises to raise their business profile and attract new businesses.

'SME is not just about medium enterprises, it's about small businesses too,' says Mr Tan. In fact, the award has helped shine the spotlight on this segment, allowing stakeholders to realise that engaging emerging enterprises is not as risky as commonly thought, he adds.

Since its inception in 2008, the number of applications for the award has grown more than 10 times, a positive reflection of the growing number of promising young enterprises in Singapore, he adds.

Emerging Enterprises 2012 is into its fifth year, and is jointly presented by The Business Times and OCBC.

Mr Tan: 'To say we'll give you your first loan is a sign of commitment to the relationship. It's a further endorsement to say if you want to go overseas, and you qualify (for the loan), we will give it to you.'

Mindy Tan