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Managing cash flow like a small business pro

Dr Biz • Aug 11, 2020

Running a small business is no mean-feat, not least when it comes to cash-flow. While coming up with a concept and launching your idea may have seemed like the hard part, the real challenge often comes with managing accounts and continuing to stimulate growth, and having adequate cash-flow for that is absolutely essential.

Despite this, though, many of Singapore’s SMEs struggle to find the financing they need. According to figures from insurer Aon, more than 60 percent of SMEs are seeking external funding through bank loans to help with cash flow financing. Yet, data from Entrepreneurs Digest shows that only 22 percent of bank loans are actually given to small and medium sized businesses, leading to a financing gap of S$20 billion.

In recent years the Singapore government has shown huge support for SMEs, from helping them to go digital and to expand into new markets. Nonetheless, financing remains one of the biggest hurdles for smaller businesses, who must continue to be creative when it comes to cash-flow.

Fix the roof while the sun is shining

As much as we all like to make bad-guys of the banks, they are only doing their jobs by managing risk as best they can. SMEs are typically riskier prospects than larger businesses and so it can be harder to justify lending to them, particularly if the business happens to be in financial distress. Thus, while it may seem counter-intuitive, it is usually better to look for a loan when business is actually going well.

Wary of accumulating debt, many SME owners often only seek-out financing when cash flow becomes stretched; however taking out a loan when you don’t need to can make much more sense. Not only is the bank more likely to accept your application, but you can also put that cash to work by investing for your future growth, or holding it in a high interest, low risk instrument. Either way, you’ll be fixing the roof when the sun is shining, rather than when the rain is pouring in.

Digital financing

The relaxation of restrictions by the Monetary Authority of Singapore has paved the way for the creation of a number of digital financing companies that target lending to SMEs. These online lenders are able to offer smaller, uncollateralized loans that banks would typically not consider. Some of the most well known names in the space include Grab Finance, the lending arm of ride hailing service Grab.

In 2019 Grab launched a service offering loans of up to $100,000 to SMEs in South-East Asia. Applications are made online in as little as two minutes, with the funds available in three days or less. Another option is Lending Bee, which also offers unsecured loans of up to $100,000 over three years; or SeedIn, which provides businesses with up to S$2 million for periods between 3 and 12 months.

Peer pressure

Breaking even more innovative financing ground than the digital financiers are Singapore’s peer-to-peer (P2P) lenders. These are online platforms where lenders can borrow from users who deposit funds in exchange for a regular yield, or interest. These users will often be individual investors, meaning financing companies are cut-out of the lending process all-together.

P2P lenders will often accept SMEs that may struggle to find financing elsewhere; however to compensate their users for taking this extra risk, interest rates will often be higher. Some of the original pioneers in the space include Moolahsense, which provides loans of up to S$600,000 at around 18 percent APR, and Funding Societies, which offers loans of up to S$2 million at variable rates.

Protect your cash flow

Managing cash flow isn’t all about getting more if it, though. In-fact, one of the key ways to ensure sustainable growth is to protect your business income and cash holdings from unexpected events through risk transfer products. These might include trade credit insurance, which covers businesses if customers pay debts late (or not at all) giving them confidence to extend credit to new clients without fear of shrinking balance sheets.

Working cash flows can also be improved using surety guarantees, or surety bonds, issued by insurers. These protect lenders against losses when transacting with a company by protecting a certain amount of the debt, up to the limit of the bond, from non-payment. While not cheap, such policies can be useful when considering a particularly large transaction - especially if it could make or break your business.

As SMEs look to grow and thrive beyond the current Covid-19 pandemic, strengthening cash flows and securing financing will be crucial. Whether it be shoring-up cash buffers, funding expansion, or getting the guarantees you need to make that big deal, make sure your business is set up for long-term, sustainable growth.

At Dr Biz, we provide tailored and comprehensive solutions for our client's business needs. From incorporation to accountancy, tax and payroll, to professional advisory services, we help businesses in Singapore assess potential risks and become more cost effective and efficient.

To find out more, please feel free to contact us.

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