Businesses count on cash as the sustenance it needs to operate and similarly, even your very own future cash cow will need to consume a lot of the green stuff before you have the opportunity to milk it. Some of these funds will go towards investments in assets that are vital to start up the company, while some of it will go towards fixed costs such as salaries, software licenses, website subscriptions or rent. Aside from these overheads, there are also variable costs such as certain utilities or transportation to cover. All this clamour for cash has to be attended to. There are various ways this can be accomplished with external business financing being a potentially beneficial way to bridge these needs.
Just over 10 years ago, business financing in Singapore primarily originated from traditional sources like banks and credit unions. This typically involved a credit evaluation and resulted in a plain vanilla loan, with a choice to pledge collateral or not. Factoring or invoice financing, which was already commonplace since the 1960s1 where a company would sell its receivables to a third party for upfront funds was as far as financing options would deviate. Then came the subprime mortgage crisis that precipitated the largest2 global financial crisis since The Great Depression of the 1930s. In its wake, reforms were instituted to curb the risky lending practices that was the cause. More oversight was established, such as increased capital requirements3 as required by the Dodd-Frank act in the USA.
Evolving to meet the demand for business financing
Tightening of credit has proven to be a challenge for smaller companies. This difficulty in securing financing can result in missed business opportunities, negative cash flow, negative working capital. In the subprime recession years from 2007 – 2009, there was a sharp contraction of Small & Medium Enterprises (SME) loans granted globally. With new SME loan growth rates hitting the bottom in 2011, the following years up to 2019 continued to see little growth4. As SMEs were considered riskier propositions by financial institutions, access to financing had become more difficult since then5. However, with the need for finance to fuel business growth still a pressing need, other players stepped in to fill that gap, giving rise to the innovation and inventiveness that is alternative financing.
Crowdfunding is a method of financing that bridges the gap between companies and members of the public looking for a profitable investment. It draws together small amounts of capital from a large number of people to fund a commercial enterprise. This is done through an online platform, with examples like Kickstarter, Indiegogo and Gofundme.
Far from being a one-trick pony7, crowdfunding comes in several varieties.
A technology based platform links multiple lenders of small unsecured amounts to pool together larger amounts. The administrator of the platform determines the interest rate and also evaluates the riskiness of the borrower.
Similar to buying shares through a stock exchange, equity crowdfunding involves sale of a stake in a business to a large number of investors.
Commonly used as seed money to finance a product, investors make specific contributions in exchange for rewards, or delivery of the product itself at the end of the campaign.
As the name suggests, no compensation is expected or given but the financial aims are met by the contributions of multiple individuals.
Profit-sharing / revenue-sharing
Future profits or revenues of the business are shared with the crowd in return for providing funds now.
Individuals invest in a debt security issued by the company, such as bonds or debentures.
Investors are compensated by several of the above ways for providing money upfront.
One type of crowdfunding is not necessarily better than another. However, it is the motivation behind each type of crowdfunding that matters because it has to appeal to potential investors and their motivations. Crowdfunding can be a risky investment to those that contribute to the fund as they may come up empty handed if the project fails. Conversely, to the business seeking funds, the benefit is that there is no obligation to make good on its promises if the project fails.
Companies like Paypal, Amazon, Alibaba Tencent and even Grab all have a strong client base, a popular platform to access its clients and cash to spare. These companies are no stranger to industry disruption and have taken on traditional financial institutions to provide loans to those typically overlooked by banks and lending institutions and also to take a bite of their pie.
Fintech loans are able to leverage on its technology to assess risk more accurately and cheaply. It also typically has lower operational costs due to innovations in technology which it can pass on to clients as savings. It is also able to process loans quicker, even able to turnaround approval of loans on the same day7.
(Alternative Business Financing Singapore – fintech)
Government Assisted Funding
There are many initiatives to encourage innovation and to sustain promising startups in the critical initial stages. Government agencies such as Spring Singapore, Economic Development Board and Enterprise Singapore have various schemes to assist SMEs financially8.
These can come in the form of loans at attractive interest rates or outright financial assistance in areas such as productivity, technological upgrading or research & development.
Venture Capital Financing
This kind of funding involves a group of investors, institutions or investment banks like Goldman Sachs and Morgan Stanley that identify and nurture startups that they believe have long-term potential. In exchange, these investors hold private equity stakes in the company. In addition to relinquishing some ownership in the company, the founders often have to satisfy other conditions that pertain to its operations.
Initial Coin Offerings (ICOs)
An initial coin offering is similar to an Initial Public Offering (IPO), except that instead of receiving company shares for their investment, investors receive a cryptocurrency token. These tokens are often purchased in other more established cryptocurrency tokens such as Bitcoin or Ethereum.
If an ICO is successful and passes the ICO stage its price would already have risen. If it gets listed on an exchange, it can be traded like shares. In addition to this, investors would also be entitled to product, service or bonus tokens as indicated by the white paper.
The benefits of an ICO to companies is the ease at which one can be launched, especially in Singapore which is amongst the most receptive in the world to the launch, and exchange of digital currencies. There are few regulations required by the Monetary Authority of Singapore (MAS) and no license is needed. The company has to be a private company in Singapore, and publish a prospectus under certain conditions.
Alternative Business Financing in Singapore Funding the Underserved
SMEs make up 99% of companies in Singapore12 and contribute about 43% to GDP13. Despite the significant contributions to the economy, this group is often underserved by traditional financial institutions. It is an unsustainable status quo as they seek funding to grow. As necessity is the mother of invention, alternative business financing in Singapore is sure to keep growing.