In a previous post, we discussed what FinTech means for ecommerce: a world of opportunity. But what does it mean for Singapore, and for our small business loan scene?
Some experts have dubbed the "FinTech Revolution" a natural counterpart to the ecommerce explosion, and its inevitable ally. That's because for both ecommerce and FinTech, the name of the game is disruption. Like how ecommerce disrupted traditional retail, FinTech is threatening the financial services industry in much the same way. Especially, in meeting small business loan needs in Singapore.
But with the rise of every young upstart, there's an uneasy incumbent guarding the status quo. We're seeing an interesting stand-off emerge in Singapore's financial services sector: pitting the old vs. the new, the physical vs. the digital, the banks vs. alternative lenders. So... who will win?
According to a 2015 Visa and Deloitte Digital SME Banking Study, 41% of SMEs in Singapore have no access to bank loan financing. This is in spite of the fact that 72% require funds to better manage their working capital and cash flow.What's more, SingStat records the Nominal Value Added of SMEs to be 48% of the Singaporean economy in 2018. In total, it amounts to $212 billion. That's a huge untapped market, and a glaring gap in the financial services sector.
But why is it so hard for an entrepreneur to secure a small business loan from banks, in Singapore and otherwise? As Benjamin Teo from Linkflow Capital Pte Ltd explains, "SME owners must recognize the fact that banks are institutions in the business of managing risk. The SME financing loan book is typically regarded as a high-risk segment for banks due to lack of credit information and correspondingly higher default rates."In other words, it all comes down to the way the big banking bodies are built— with low-risk appetites. Banks won't starve if they forgo financing small businesses; their diet is mainly composed of other, more profitable, less risky investment portfolios. That's why banks impose stringent conditions on small business loans... and ironically, for the small businesses who need them the most.Typical obstacles to credit access for SMEs include prolonged risk assessments, tedious document submissions and audits, and low approved limits. Which also means: it's slow, it's fussy, and you might not even get a loan after going to all that trouble. Moreover, since banks attach stringent criteria to credit access, or even deny loan applications to promising SMEs altogether, they're also isolating a vital demographic of entrepreneurs.In short, small businesses need banks more than banks need them— or at least, they used to. The balance of power seems to be shifting, with the emergence of new players in the SME funding equation. After all, since a significant proportion of SMEs aren't being served by financial institutions, that leaves room for fresh alternatives to pop up, and take over.
Of course, that's where innovations in financial technologies come in. As we've previously covered, FinTech is introducing new lending methods. But what do options like a revolving line of credit and invoice financing— all of which can be applied for virtually— mean for banks?While most traditional financial institutions have started incorporating new technologies, they're usually slower on the uptake. But FinTech is no longer just a bonus feature to tag onto existing functions; it's become a force all on its own. Now, it's creating whole business models— ones that are exciting, unprecedented, and daring to make a difference.So while traditional banks have lagged in the digital race, smaller FinTech firms have risen to take their place. The latter category offer more diverse, flexible and tailored funding solutions, and especially to a hitherto under-served profile of small businesses in Singapore.
According to an industry report, online alternative finance in Singapore grew by 312% between 2015-2016. Statista estimates that the total transaction value in the alternative lending segment will amount to US$247.3m in 2019. So it's clear that alternative lenders are gaining traction, and growing fast.So what does that mean for startup and SME business owners? With alternative lenders, your ability to apply successfully for a small business loan in Singapore isn't just contingent on baseline revenues and flawless credit reports anymore. Instead, metrics for risk assessment can now include non-conventional data, like business transactions.In short, FinTech is matching funding solutions to the people who need them the most. In other words, small business owners who aren't eligible for bank loans. Now there's a new dynamic between lender and borrower. Alternative financing firms depend on SMEs, just as much as SMEs need them. Smaller FinTech lenders and online credit apps can grow as fast as the small businesses they serve. That is because they embrace and empower the valuable markets left behind by large banks and traditional financial service providers.
So if FinTech and e-commerce are the young upstarts, the enterprising revolutionaries, they've left stodgy banks and brick-and-mortar stores in the dust. Working together, the advent of FinTech has presented endless opportunities for entrepreneurs to start, and scale up, their businesses.The barriers to growth erected by traditional lending institutions inherently marginalize small businesses with the potential— but not the capital— to grow. Small businesses and alternative lenders have to grow together in tandem: playing on each others' strengths, compensating for shortfalls, and advancing with the same goals and interests. With FinTech lenders, it's an alliance, not a transaction. The FinTech Revolution is transforming the SME ecosystem by building new dependencies, and opening new avenues for collective growth.As an idea, as a concept, and as a vision, FinTech is more than the sum of its (existing) parts. "FinTech" promises much more than its current iterations. As with any technology, it's up to us to dream new inventions into existence. And it's due to play a greater role in the start-up and small business ecosystem than ever before. Join the revolution today.Psst... you might also be interested in: When Should You Get a Business Loan?Profitable Small Business Ideas for the Internet AgeThe Small Business Owner’s Basic Guide to Digital MarketingAt Aspire, we envision a world where business owners have fast and simple access to the funding they need to grow. That’s why we’re on a mission to re-invent banking for SMEs across Southeast Asia. Our current product provides SME and startup owners in Singapore with financial flexibility through a line of credit of up to S$150k. Which, can also be used to make business payments to enjoy 60 days free credit terms. With no monthly fees or obligations to withdraw, you only pay interest on the amount you end up using. Opening an account is free and can be done online here.