Choosing the right financing is critical to a business. Entrepreneurs have traditionally relied on bank borrowings to finance their business. For start-ups, these could be in the form of letters of credit and trust receipt facilities. For growing businesses, popular financing products among small and medium enterprises (SMEs) include overdraft, long-term loans and trade financing. The number of SMEs tapping on term loans appears to be on an upward trend. According to the SME Development Survey 2006, this figure has increased steadily from 26% in 2004 to 34% in 2006 for long-term loans, and from 21% in 2004 to 27% in 2006 for short-term loans.

Interestingly, some SMEs, especially start-ups, are turning to equity financing from business angels and venture capitalists, as their lack of business track record and collateral make it difficult for them to secure bank borrowings.

Enterprise Today speaks to two industry stalwarts, one representing a financial institution and the other a venture capitalist, on the SME financing scene today.

"With our staff having many years of experience, we see our role as an advisor. We may advise an SME initially to go and get more equity. As the company gets more traction and goes on to the next level beyond survival, we can suggest that they borrow against their stocks and receivables, unlocking these to fund further growth." Mr Ian Macdonald, President of Hong Leong Finance

A partner in times of need
No doubt, lending to a new setup comes with much risk; more so in uncertain times. For Hong Leong Finance, providing credit even in times of uncertainties is very much its business. In fact, it has made a name for doing so. Mr Ian Macdonald, President of Hong Leong Finance, recounted how the company took a proactive stance during the critical period when the Severe Acute Respiratory Syndrome (SARS) struck.

Mr Macdonald said, "During SARS of 2003, we saw the industries that were affected the most - the hospitality industry, the transport industry - and went out to customers, asking them: How can we help you?" This gesture was much appreciated by the SMEs and Hong Leong enjoyed double-digit growth during those difficult years.

From handling customers' cash flow needs, Hong Leong has given value-added services like taking an SME from the conceptualisation stage of public listing, right through the period after the bell rings. "With our staff having many years of experience, we see our role as an advisor. We may advise an SME initially to go and get more equity. As the company gets more traction and goes on to the next level beyond survival, we can suggest that they borrow against their stocks and receivables, unlocking these to fund further growth."

Encouraged by Singapore's positive economic outlook, foreign banks have stepped in to pursue a slice of the SME market. Hong Leong is keeping ahead of the competition by building customer loyalty and getting their officers to maintain relationships with the same customer for as many years as possible. This consistency has won the trust and goodwill of many SMEs, with relationships lasting 20 to 30 years, even into the second generation of leaders on some companies.

To further strengthen its position, Hong Leong has also been building up its portfolio of services to SMEs. The Business Current Account is the latest in a string of new services rolled out by Hong Leong Finance. "The Business Current Account facility complements the suite of services that we are already offering to our customers and reaffirms our position as a one-stop SME service provider. With this added convenience, SMEs will be better able to transact their daily business needs and also improve on their cash management," said Mr Macdonald. Hong Leong Finance is the only finance company here to receive exemptions from the Monetary Authority of Singapore for services such as the distribution of insurance, unit trusts and structured products, underwriting and managing Initial Public Offerings, corporate finance advisory services and foreign exchange transactions for business.

Sharing his views on the SME financing scene today, Mr Macdonald said, "Looking at the range of financing products available in the market today, there has never been a better time for SMEs to expand their operations."

In pursuit of venture capital
For some SMEs, debt financing may not be their best source for external funding. This is especially true for start-ups which lack a business track record, as many loan products today still require collateral. The option of equity financing via business angels and venture capitalists therefore appears more suited to their needs. Notably in this year's DP Information - ACE Start-up Enterprise Survey of Singapore, three out of every ten start-ups have indicated their willingness to consider equity financing. But the competition for funding from venture capitalists is getting tougher by the day, with more venture capitalists looking towards India and China for investment opportunities. Sirius Venture Consulting is one of the few venture capitalists that have made their commitment to focus on companies in Singapore.

Sirius has invested from $50,000 to $3 million in companies in Singapore, China, Hong Kong and Australia. One such local company in its portfolio is TecBizFrisMan, an SME that performs computer forensic and digital investigation, and manages software licensing for businesses.

"So what do venture capitalists look out for? Mainly the three "R"s - the right entrepreneur, the right leadership, the right business." Mr Eugene Wong, Managing Partner of Sirius Venture Consulting

Mr Eugene Wong, Managing Partner of Sirius Venture Consulting, said, "SMEs in Singapore face a lot of challenges because of our small economy. They need to go global. The capital market is not as highly priced as US or UK, so SMEs face challenges in raising money and seeking growth opportunities."

So what do venture capitalists look out for? Mr Wong listed the three "R"s - the right entrepreneur, the right leadership, the right business. He added that referrals from friends and business associates are a key consideration in sizing up the intended business that is looking for capital infusion for expansion.

Describing the partnership, he said, "We usually become friends first, getting to know the character and integrity of the other party, before we get married". He stressed that in his assessment of businesses, he looks for a leader who has the heart to grow the business for the welfare of his customers and employees, and not just for profit.

After Sirius invests in a company, it typically helps with the corporate development, strategic planning, financial planning, and especially corporate governance. But it would not be involved in the operations since the company must be well-run in the first place to have won over the VC's interest. "You'd be surprised how many SMEs have never had a proper board meeting until the day they are listed," said Mr Wong.

More financing opportunities for SMEs
Sharing his views on new financing opportunities for SMEs, Mr Wong applauded the revamp of SESDAQ, Singapore's secondary stock exchange, as a move in the right direction. He said, "Previously, the SESDAQ did not help high growth SMEs as the cost and rigour of listing a company under SESDAQ was similar to listing under the main board."

Expected to roll out by early November this year, the overhaul is expected to speed up the listing time frame to just four to five weeks, compared to the current 12 to 17 weeks. Those aspiring to list will also no longer need to issue a prospectus. These changes are expected to benefit small companies by reducing listing costs and attracting more attention to high growth SMEs. This latest development comes in the light of an improving financing landscape for SMEs. With new financing sources and options to choose from, coupled with the support of the government, SMEs look set to exploit new opportunities for their expansion. ET

Financing Options for SMEs

Extract from Financing Handbook for SMEs published by the Action Community for Entrepreneurship, the Association of Banks in Singapore, SPRING Singapore and Stone Forest Consulting Pte Ltd

Click here for the chart of "Financing Options for SMEs"

Government Financing Schemes

The Government plays a key role in supporting local businesses and their financing requirements. The table summarises the schemes for SMEs:

Managing Working Capital

Cash flow is undeniably the lifeline of every business regardless of its stage of development. Managing a sustainable business in a volatile business environment requires adequate cash flow and funding. Most businesses fail because entrepreneurs do not manage their working capital well.

It is important to know how much money you need to run your type of business as is the business cycle of each business is unique, with its own sales trends, stock holding period as well as payment and collection patterns. Each cycle starts from the day you receive an order from your customers and ends when you collect cash from your customers.

Key Elements in Working Capital Management
There are two elements in the business cycle that use cash - inventory (stocks and work-in-progress) and receivables (money debtors owe you).

The main sources of your working capital are the 4 Cs:

• Collections (when debtors pay you)
  
  
• Credit terms (when your creditors provide credit)
  
  
• Credit facilities (where your banks provide you with letters of credit, factoring lines, trust receipts facilities)
  
  
• Cash (when you raise capital)

To manage working capital effectively, you need to manage the 4 Cs. You can do this by:

• Collecting payment faster than the credit terms provided by your suppliers. This way, you will not need to use your credit facilities to pay off your suppliers first before collections come in.
  
  
• Reducing inventory levels. This will reduce your need for credit facilities and cash, and result in bank interest savings. The operating cash flow can be used to boost sales or for investment.
  
  
• Negotiating for a longer credit period and increased credit terms with your suppliers. This will decrease reliance on your principal bankers.
  

Any of the above will improve the management of your working capital.