COVID-19: Why are SMEs Taking Out Huge Business Loans 2020

Small and medium enterprises (SMEs) are evidently feeling the heat amid the Covid-19 crisis, with public health and economic well-being on the line in Singapore and many other countries around the world. As a direct result, SMEs in Singapore have been pressured to adopt digitalization as quickly as possible in order to sustain the economy and resume business through seamless and contactless procedures comprising online accessibility and innovative measures. 

However, lack of operational efficiency and financial strain are clear obstacles, especially depicted by the fact that SMEs recently applied for loans in the past several months that add up to huge amounts. The government is trying its best to accommodate the SME sectors with supportive efforts while issuing relief initiatives to cover expenses and short-term costs.

Bracing for impact

As of mid-June 2020, over 7,600 SMEs in Singapore have applied for business loans under the government-assisted financing schemes that came to approximately $7.1 billion since the beginning of March this year. This is more than five times the credit that was extended in the whole of 2019. 

For the most part, these trends were leading up to the anticipation of the severe impact caused by the pandemic. SMEs are reinforcing their finances as a defensive measure, especially since the looming recession has caused fear and anxiety across the board. Some companies applied for these funds as a way to meet short-term costs that most businesses incur like salaries, monthly rental bills and other small expenses that need to be met on a monthly basis. Other companies are deciding to use the funds as a way to reinforce their preparation phase as the economy recovers over time.

Businesses that have opted for this government-backed financing schemes come from a multitude of different sectors and industries. There's a certain percentage from wholesale trade and a lesser portion from the manufacturing and construction sectors. On the other hand, firms that fall under services and retail have also decided to apply for these loans. As expected, the approval rate for these loans is high, in line with the notion that the government is trying to keep the SMEs of the country afloat until the recovery period stabilizes.

The government has collaborated with numerous parties to try and help reinforce business survival. It has increased its risk-sharing to 90 per cent on loans under certain schemes managed by Enterprise Singapore (ESG). These schemes include the SME Working Capital Loan along with the Temporary Bridging Loan Programme

Why take out loans?

Experts have estimated that the Covid-19 pandemic might linger for a total of 18 months, or even up to and beyond 24 months. It may seem right now that many countries have managed to contain or stabilize the number of new infections behind their borders, but the fact remains that this strand of coronavirus is hyperactive and extremely contagious which means that it is incredibly easy for numbers to rise again. Second and third waves of the coronavirus can be seen in countries like South Korea, Hong Kong and Australia.

With so much element of chance on the table, businesses everywhere are deciding not to roll the dice. Business loans based on SME-relief schemes and other forms of government-assisted financing are there for a reason - acting as a buffer between a business's financial stability and the point of no return. 

SMEs are also significantly more vulnerable to pandemic-disruption in comparison to larger corporations that are arguably in better positions to withstand unexpected adversity. Small businesses often lack the financial resources, long-term stability or strategic capabilities to outlast long-term crisis scenarios. For this reason, business loans have been issued and approved quite frequently on behalf of the small businesses in Singapore.

A steep learning curve

In essence, the recent turn of events has exposed numerous vulnerabilities across various business aspects, ranging from operations and supply chain management to financial management and relationships between different institutions within a given industry's infrastructure. 

The fact is that while SMEs may seem vulnerable right now, it is of the best interest for everyone that they remain healthy. SMEs contribute a staggering amount of force to the overall economy, due to the sheer quantity of small businesses that make up 99% of Singapore's enterprise landscape. If the SME line starts to falter, it's a given that many other structures are in trouble too.

With that, there are many opportunities to learn and grow past the pandemic. SMEs need more attention and support from now on, regarding cash flow management issues, financial conundrums and stronger access to digital adoption measures that allow them to function more efficiently. 

Logistics and supply chain assistance is also a great way to fortify SME strength, and there are already plenty of digitally-driven solutions on the market that cater to these specific business components. Warehousing, storage, inventory and point-of-sale solutions are all great tools to have in the marketing and production arsenal of small businesses. As digital tools become more accessible and online adoption becomes more natural among SMEs, the strength of smaller business operations should develop gradually. 

Beyond that, banks are already being forced to cater to the smaller business market as Fintech solution providers and startups enter the financing territory. Banks that fail to keep up with the constant barrage of innovation could lose a significant share of SME business. Furthermore, partnerships are being encouraged between established institutions and Fintech players to optimize offerings and push progress in an organized and effective manner.

 

Read also: COVID-19: Smart Towkay's Essential Business Survival Guide for this Pandemic
Read also:
COVID-19: How Can Singapore's SME Relief Measures Help Businesses During This Pandemic
Read also:
COVID-19: Could a Business Term Loan Help You Survive The Current Crisis

 

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Not sure whether your company can be qualified for bank loans or alternative lending? Try our A.I assisted loan, and Smart Towkay team will send you a lending report within 24 hours' time. With the lending report, we aggregate and recommend the highest chance of approval be it with BANKS / FINANCIAL INSTITUTIONS or Alternative lenders like Peer to Peer Lenders or even B2B lender!  

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UPDATED AS OF 29 Oct 2020
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