Keeping SMEs in business: How alternative lenders are plugging the financing gap, and are now put to the test

SMALLER enterprises with a lack of track record have traditionally been ignored by big banks due to the perceived risk. With advancements in technology, a world of possibility has opened up when it comes to alternative financing. New ways of credit assessment using data allow alternative lenders to plug the gap, to help small and medium-sized enterprises (SMEs) that fall between the cracks get the financing they need. But with the ongoing Covid-19 pandemic, these lenders are put to the test as the cracks widen, and as SMEs struggle to keep the lights on. The upcoming digital banks may also eat their lunch as they target the under-served small business segment. Three SME lenders tell The Business Times how they intend to compete, what they are doing to step up their game, and how they are bracing for the downturn that lies ahead.

GOLDBELL FINANCIAL SERVICES

VEHICLE leasing heavyweight Goldbell Group may have more than four decades of history, but its financial solutions are anything but traditional.

Its financing arm Goldbell Financial Services, led by third-generation business leader and former JPMorgan banker Alex Chua, seeks to shake up how SME financing is done through innovation in debt structure and technology.

"We give customers a different approach to borrowing money," Mr Chua tells BT.

Its latest initiative, known as Polaris, is a launchpad for businesses to work with Goldbell to construct scalable and growth-focused debt structures, collaborating to gain additional revenue streams.

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In essence, Goldbell does not just simply lend money, but also tailors financing solutions customised for each SME, and provides resources and networks to help them grow.

More focused approach

The idea behind it came more than two years ago, but Polaris was only officially launched early this year as a more focused approach to support SMEs.

One such SME that Goldbell has brought on board Polaris is buy-now pay-later business Rely, an online payments platform that allows participating retailers to offer customers the ability to split their purchase into interest-free payments.

In this case, Goldbell funds all of Rely's transactions through a scalable joint venture funding structure. Goldbell's backing ensures that Rely will have access to sustained funding sources, enabling the startup to focus on acquiring more merchants and consumers. In its next stage of development, Goldbell is looking at providing financing solutions to Rely's merchants.

The amount Goldbell pumped into each partnership ranges between S$300,000 and S$5 million so far, but the amount is flexible, says Mr Chua.

Goldbell evaluates the companies it partners with differently from the banks. Businesses need not be profitable and can be as young as six months. "The reason why SMEs are not covered in Singapore is not because of risk, but because of the cost of acquisition and the costs of dealing with an SME because a bank structure is quite rigid," he notes.

Mr Chua likens it to an "extremely small" goal post, where only SMEs that can fit particular criteria get access to loans. Often, they must be profitable and be in operation for at least three years. "But for us, we try to look at the future of the company," he adds.

Among the criteria that Goldbell prioritises includes the mindset of founders. "A lot of these founders are too stuck on running the day-to-day operations and cannot look at doing something a bit differently," says Mr Chua. Companies they work with must also be digital in nature, as Goldbell watches for data on transactions, he adds. These companies should also be channels for them to lend, lowering acquisition costs for Goldbell.

For instance, another SME that is on the Polaris network is food-ordering platform Oddle. Goldbell partnered Oddle to co-design a Merchant Cash Advance Programme that allows Oddle's merchant partners to gain quick access to capital within 48 hours. This is done by leveraging on sales data from Oddle's platform to quickly perform credit assessments.

To date, there have been zero non-performing loans (NPLs) under Polaris. For Goldbell Financial Services, which started in 2015, the NPL rate is less than 0.15 per cent. It has disbursed over S$906 million as of Oct 31, 2020 since its financing arm started five years ago.

Polaris is not the only option for SMEs that turn to Goldbell for financing. It was approved in May to provide SME financing through the Enterprise Financing Scheme's Temporary Bridging Loan, where the government shares 90 per cent of the risk.

Even as Goldbell's loans are more costly compared with the traditional banks, SMEs sometimes prefer to turn to them because of less friction involved, says Tan Chun Hao, head of strategic partnerships and projects, Goldbell Financial Services. For instance, Goldbell's government-backed Temporary Bridging Loan comes with an interest of 5 per cent, while local banks can charge below 3 per cent. However, Goldbell is able to disburse funds as quickly as three days after the paperwork is complete. Banks can take up to months, especially for young SMEs - if they even decide to lend at all.

Space for collaboration

Even with the digital banks coming up, Mr Tan says Goldbell does not view them as competition.

"The banks possess certain advantages that FIs (financial institutions) like us do not currently have, such as banking accounts and lower cost of funds. So there is definitely space for collaboration," he notes.

SMEs that are on the Polaris network may be underserved by banks at this juncture, but once they grow into a sizeable portfolio with the right credit risk structures and a good track record, Goldbell could then invite banks to participate in the existing loan book or to provide additional funds, he adds.

According to Mr Chua, the real reckoning for lenders - including Goldbell -- will come when the loan moratoriums end next year. While he projects that NPLs will edge up slightly, he is confident that the business will weather the storm on the back of their credit assessments and relationship with borrowers. "There are inherent risks, but the important thing is to work with SMEs to get through it together," he says. "If I pull the line, it will be bad for both of us."

VALIDUS CAPITAL

SINGAPORE peer-to-peer lender Validus Capital is no stranger to SME financing here, having disbursed over S$550 million of such loans to date since it started five years ago.

It partners blue-chip companies and government-linked companies to finance their SME ecosytems, says Nikhilesh Goel, co-founder and CEO of Validus Capital.

These SMEs are typically businesses which either do not qualify for traditional bank loans, or are not able to obtain adequate credit or do not have adequate collateral.

Such partnerships allow the fintech to bridge the SME financing gap, while protecting the interests of investors on the platform who are seeking to diversify their portfolio, adds Mr Goel.

Validus, which has raised US$35 million to date from notable investors such as Temasek-backed Vertex Ventures, offers SME vendors zero-collateral financing via three key products: Invoice financing, purchase order financing and unsecured business loans.

It is through the partnerships Validus has with corporates that the fintech has access to data on SMEs to carry out credit assessments, taking into account both previous performance as well as trade data. In addition, its underwriting model can rely on data analytics, rather than traditional financials and collateral, he adds.

This also enables Validus to finance SMEs in certain sectors such as shipping and marine, which are often shunned by traditional banks due to their volatility.

Skin in the game

Even so, Mr Goel makes clear that the fintech's key focus is on enabling access to growth financing for SMEs.

"In line with our credit standards and policies based on that, Validus does not lend to extremely risky sectors, or SMEs in dire straits," he notes.

In addition, even though it is a P2P platform, Validus also has skin in the game as it invests alongside investors on the platform, but declined to give a specific figure.

Earlier in October, Validus secured approval to offer SMEs financing through government-backed loans under the Enterprise Financing Scheme. This will be financed through its balance sheet.

For a start, Validus' initial focus will be on SMEs that come through its larger corporate partners and collaborators; it expects to bring on more SMEs from sectors such as engineering, shipyard, marine and distribution in this scheme.

Mr Goel expects that working capital loans will form a "significant part" of its portfolio in the next six to nine months.

Opportunity for collaboration

Validus saw month-on-month growth in disbursement volume in the last quarter, up 45 per cent following the lows during the pandemic peak months of March and April.

While the fintech did not reveal its non-performing loan (NPL) rate for this year, the figure stood at 2.69 per cent in 2019, of which 60 per cent has been subsequently recovered as of April 16 this year. For this year, it is expecting NPLs to be similar as compared to last year.

To assure investors that it is actively managing portfolio risks, Validus has tightened credit policies for SMEs in sectors heavily impacted by the pandemic, reducing limits and the average loan tenor, notes Mr Goel.

As Singapore gears up for the upcoming digital banks, Validus sees it as opportunity for collaboration, instead of outright competition.

Validus was earlier reported to have been in a consortium comprising OCBC, Keppel Corporation and Vertex Ventures to vie for a digital wholesale banking licence in Singapore.

Talks broke down, understood to be because of Keppel's then-ongoing review of its core operations.

According to Mr Goel, the fintech is now in talks with potential partners and "may collaborate in some form", declining to give details as it is still premature.

In fact, he predicts that in the future, there will be increased tie-ups between fintechs and banks for improved SME financing services and adoption of open banking to meet SMEs' needs.

He also expects industry practices to be enhanced, such as data sharing in fraud prevention, quality reporting via credit bureaus, and use of new data sources in enhancing quality of risk decisions.

FINAXAR

WHEN alternative lending for SMEs is brought up, peer-to-peer lending platforms usually come to mind.

But fintech Finaxar is going a different path - as a balance sheet lender, it raises funds from specialist funds and asset management companies, then disburses loans from its own pockets.

"Using data and technology, we underwrite and extend loans that were operationally expensive for traditional banks to do," says Vihang Patel, co-founder and CEO, Finaxar.

As such, Finaxar takes on the credit risk of the borrower, which he says requires a "thorough and cautious customer screening process".

P2P platforms, in contrast, are not exposed to bad loans that they underwrite as they are usually the intermediary.

With Singapore not out of the woods yet as recovery has been slow, Mr Patel says the fintech is maintaining a cautious position when it comes to the current risk environment.

Since Covid-19 struck, Finaxar has seen a 20-25 per cent monthly increase in loan disbursement as demand went up.

However, the fintech has had to restructure 7 per cent of its overall loans, with SMEs in the food and beverage and hospitality sectors particularly affected.

It declined to give its non-performing loan (NPL) rate, only that it is in the "low single digit".

Suite of solutions

The fintech, founded in 2016, is backed by venture capital firms the likes of Monk's Hill Ventures, 500 Startups, as well as financial institutions from Europe and Asia such as Cathay Financial Holdings. It has raised an eight-digit figure (in SGD) so far.

It offers a suite of digital finance solutions for SMEs, including credit lines, receivable financing and purchase financing. Finaxar Credit Line, for instance, is accessible via e-commerce platforms like Lazada in Singapore and Vietnam, as well as Amazon in Vietnam.

Earlier in October, the fintech also launched a spend management solution known as Flex by Finaxar in collaboration with Visa to better control their expenditure through a single platform.

This came from the fintech's experiences working with SMEs, says Mr Patel. The team had realised that slow transaction times due to manual administration of invoices, payments and receivables impacted SMEs' cash flow and overall responsiveness to business demands.

According to Mr Patel, Finaxar supports SMEs from all sectors, running the gamut from startups to e-commerce to logistics. He believes that while banks or venture capital firms (VCs) service these segments, they are not quite able to meet their needs. For instance, while VCs support startups or young SMEs with equity, they tend to be unable to meet the need for working capital financing, Mr Patel adds.

Even for more established sectors like logistics, finding a working capital financing partner that is easy to work with, especially for short-term financing, can be challenging, he says.

Mr Patel points out that one of the key challenges restricting access to capital for SMEs is the lack of access to reliable data that can help in assessing creditworthiness, as well as disbursement loans which are smaller in size in a cost-effective model. To overcome this, its primary model for credit assessment relies on using a combination of financial data from the SME and credit bureaus as well as alternative data from Finaxar's data partners that it accesses via application programming interfaces (APIs), he says.

For instance, if an SME sells on Lazada, Finaxar will provide a one-click integration to connect their account to its platform for credit assessment.

Addressing wide range of needs

This presents a more forward-looking view of the SME by viewing transactions, rather than relying on traditional methods of historical data of financials, which in itself were not reliable, he explains.

Finaxar's loan ticket size ranges from as small as US$1,000 to up to US$500,000, depending on the market. It declined to give the overall loan volume to date, but disclosed that it has crossed S$100 million in disbursements to SMEs since inception.

But besides being a direct lender, Finaxar also partners with incumbent banks to address a wider range of SME needs, such as through its "lending-as-a-service" solution to change and digitise SME finance. Lending-as-a-service is a model where fintechs like Finaxar provide digital lending technology to banks, offering a range of services including customer origination, loan processing, underwriting, monitoring, disbursement and collections.

With that, Mr Patel does not see the upcoming digital banks as a threat, but a potential collaborator. "Both conventional and digital banks will have to partner with other institutions, like fintech platforms, to step up their game," he says. "We do not intend to compete with digital banks directly." Finaxar's long-term goal is to get to that level where it can work with financial institutions globally, he shares.

Looking ahead, the fintech will soon roll out its "buy-now-pay-later" solution in Singapore - known as Finaxar Pay - aimed at businesses in the business-to-business (B2B) sector, particularly those who purchase and sell on the B2B e-commerce marketplace. It has already been launched in Malaysia and Vietnam.