Compared to banks, alternative financing platforms have less dry powder to pass around. But they have the flexibility to tweak their credit criteria or issue loans to sectors deemed too risky for banks. With these risks, SMEs must contend with higher interest rates, but it’s still a lifeline when they need it most.
Barriers that prevent small businesses from accessing alternative lending
Funding Societies sees its efforts as complementing government measures, which may not be enough for SMEs. The platform is helping to provide “deserving SMEs with short-term bridging loans to tide over the short-term cash-flow concerns,” said Jain.
Unlike banks, alternative financiers offer short-tenure loans and invoice financing to all SMEs. They can help SMEs tide over short-term cash-flow concerns. June Tang, director of honey wholesaler Xali Pte Ltd, said she uses banks for import financing but turned to Finaxar for invoice financing.
The pandemic looks set to be an inflection point for the alternative financing sector. There is a fast-growing mismatch between supply and demand. With the economic downturn, there is more demand for working capital due to increased liquidity challenges. This also means lenders’ risk appetites are declining, resulting in less funding available for SMEs.
Companies like Validus are poised to capitalise on this situation. The institutional lenders and high net-worth individuals that lend on its platform are looking to target SMEs, seeing them as opportunities to diversify from volatile markets.
Validus, however, is still likely to be affected by the liquidity crunch to some extent. Investors who might lend through its platform are smarting from losses in the stock markets. Finaxar, on the other hand, is more insulated from this since it co-funds loans with development funds. It is essentially tapping on funds that are already available just for this purpose. And as businesses look to keep the lights on, options like Finaxar, Validus, and the like are more likely to be considered than ever.
Even as the SME lending opportunity looms large for the alternative lending companies, though, risk looms larger.
Lending in a downturn has obvious risks. With companies in sectors such as oil and gas turning insolvent, banks are increasingly seeing their non-performing loans (NPL) rate rise. SMEs, which are looking for cash loans rather than invoice or contract financing at the moment, are likely to further contribute to this.
At the beginning of the year, there were more contract and invoice financing requests, said Funding Societies’ Jain. But March and April saw a significant reduction, with Covid-19 disrupting trading activity.
Banks are already steeling their books for NPL increases caused by Covid-19 by increasing their general reserve to absorb credit losses. MAS has also adjusted regulatory requirements, such as tweaking banks’ capital and liquidity requirements to sustain lending.
Alternative lending platforms have also tightened their lending criteria during this period. Funding Societies said its NPL percentage has only gone up marginally; its default rate currently stands at 1.3%. It expects a marginal increase in defaults in the near-term as a majority of the loans it gives out are of short tenure. “We have and will continue to provide restructuring options to qualified SMEs as a means to assist them during this trying time,” said Jain.