The Business Times recently published an interesting article “Coming soon: a central platform for SME loans?”, which states that PwC is creating a digital platform where SMEs can apply for business loan from multiple financial institutions.
This is a topic close to our hearts as we have long recognised the problem, that SMEs face significant barriers in obtaining business loans in Singapore, even before the onset of COVID-19.
That is the main reason for the creation of Lendingpot.sg, a Business Loan Marketplace (or Central Lending Platform if you prefer) in Singapore.
The Lendingpot platform allows SMEs to, through just one business financing request, reach up to 47 financial institutions that include banks, non-bank financial institutions, peer-to-peer (or fintech) lenders, private lenders and some selected family offices.
Our mission is to improve the financing ecosystem for SMEs in Singapore from the ground-up, and this article will explain how we are doing it.
Before deep diving into the problems and solutions, it’s important to acknowledge some key observations about business financing today.
Key Observation 1: More than 2% of SMEs in Singapore have applied for government-assisted business loan schemes.
In June this year, The Straits Times announced that over 5,000 firms have borrowed about $4.5 billion from the government-assisted schemes.
That works out to be around 2% of the 271,900 Singapore SMEs.
However, we should note that these are not the number of applications for the scheme, but rather the number of applicants that have been approved.
The low percentage does not indicate that SMEs are deterred from applying due to the lengthy process (if any) but that many SMEs’ applications are simply not approved. We know that for a fact, as many of these SMEs also applied through Lendingpot’s platform.
Key Observation 2: The process of business loan applications is no longer lengthy and tedious with banks in Singapore.
All three local banks, DBS, OCBC and UOB, now feature a fully online business loan application system with MyInfo and CorpPass integration that takes only 5 minutes to complete.
Other financial institutions are likely to follow suit and introduce digital features as they continue to pursue their digitalization plans.
When we analysed deeper, we realised these problems are subtle yet deeply ingrained in the system, and are hard to solve without a deep understanding of the ecosystem and some human-centric design thinking skills.
This is by far the single biggest factor and the main barrier that prevents SMEs from getting business loans.
Due to the lack of access to financing-related information, SMEs are (a) generally unsure if they qualify for a business loan, (b) not able to to improve their credit ratings if poor business decisions made previously had affected their loan eligibility, and (c) are unaware of their financing options.
(a) Not sure if they qualify
SME credit evaluation is an immensely complicated process that takes into account many factors such as the age of business, revenue, profitability, ending bank balances, bounced cheques (if any), past repayment history, number of directors, directors’ declared income, directors’ personal credit and repayment history, bankruptcy records, etc.
Due to fraud risk and fear of negative selection, most financial institutions will never reveal their true eligibility criteria as they always want to lend to the best borrowers.
These institutions are afraid to find themselves with only one type of applicants if they let SMEs know that they are able to accept certain groups of applicants (i.e. unprofitable companies).
Thus, most would only display a basic eligibility list, which convinces SMEs that they are eligible but yet rejects them after application. This causes a bad experience for SMEs.
(b) Not sure how to improve their credit rating
For the same reasons given above, financial institutions will never reveal the true reasons for rejecting an SME’s loan application.
They prefer to understand the “true situation” of their borrower.
This is good for preventing fraud and “coached” applicants, who may present an inaccurate version of their financial situation.
However, it can lead to unintended consequences for these uninformed SMEs, as they will not be able to improve their credit rating by implementing the correct financial processes.
An example: A business that deals primarily in cash such as a vegetable and fruit retail store, which keeps their cash for easy transactions rather than banking into their business bank account, will not be able to justify their annual revenue by only presenting their bank statements. Thus, their credit rating is penalised.
(c) Not sure who to apply to and what to apply for
Singapore is a regional finance hub and is rich with alternative lenders that present different financing options to SMEs.
Other than the basic business loan, options such as contract financing, merchant cash advance, invoice factoring and purchase financing may be more suitable and cheaper for SMEs.
However, SMEs are generally unfamiliar with the ever-changing and multiple types of business financing available, as most only look for financing when they have a large contract or an opportunity to expand every few years.
When the SME is rejected by the local banks, most would not be aware of where else to apply for financing.
Due to the complexity of SME credit evaluation and the multitude of business financing solutions available as stated above, SMEs may also encounter rejections if they apply for loans that do not suit their business purposes or request for a business loan amount that they may not be qualified for.
An example: An SME may get rejected if it were to apply for a S$500,000 Business Term Loan but based on their business model and credit rating, they may qualify for a S$500,000 Invoice Factoring credit line instead.
The Invoice Factoring facility may even have a lower interest rate than the Business Term Loan.
Sometimes, inevitably, the negative or positive experience of a loan application, and even the success and failure of that application, can be affected by the relationship manager that your case is assigned to.
Let me explain.
An experienced and effective relationship manager will analyse an SME’s request carefully. They may recommend alternative products or realistic loan amounts if they feel that this is the best option for an SME. They will reply promptly upon receiving the application regardless if the SME can qualify for the loan facility.
An inexperienced and ineffective relationship manager will simply reject the application if the SME does not qualify. That relationship manager may even ignore the application for weeks in favour of processing cases that are more likely to be approved. As relationship managers are commission-based, many may not be incentivised to respond to cases that are likely to be rejected.
Our Business Loan Marketplace leverages both technology and human expertise to simplify the current business loan application process.
We take into account how things are actually done, and use technology to simplify that, without forcing our stakeholders (SMEs, relationship managers, and financial institutions) to adapt to a new way of conducting business.
We acknowledge that large banks and financial institutions will almost certainly never reveal their credit matrix and allow third parties to make credit decisions for them.
Thus, a purely tech solution may not work well in this case.
(a) In Lendingpot, SMEs can apply for loan amounts without specifying the loan products
Lendingpot flips the application process around.
As stated above, SMEs may not know what the best financing solution is. However, what they are clear about is how much they require, and what these funds will be used for.
Lendingpot will then create a profile of the SME (company name redacted to protect privacy) and its loan request, publishing it on our Business Loan Marketplace.
(b) Lendingpot leverages on human expertise to screen SME applicants
Lendingpot’s primary points of contact are the relationship managers of partner financial institutions.
Currently, we have over 100 relationship managers from 47 financial institutions in our network.
These relationship managers will look through the requests and financial profiles of the SME applicants, and think about solutions for them.
Since financial institutions are not willing to reveal their credit matrix, the next best option would be for the relationship managers to decide if their institution will be able to provide financing solutions for the SME as they would have the experience and expertise to know.
(c) SME applicants will only receive business loan offers from lenders that are able to support their requests
Not every financial institution will be able to support an SME’s business loan application, and there is no reason why the stakeholders, both SMEs and relationship managers, should waste their time if it doesn’t work.
Through Lendingpot’s platform, an SME may receive multiple loan offers for them to choose from. They may even be presented with entirely different financing solutions that fulfill their needs.
Here’s an example: An SME is looking for a S$200,000 business loan for working capital requirements, as his customers are starting to pay him later, may receive (i) an offer of a S$200,000 term loan and (ii) another offer of a S$200,000 invoice financing facility so that he can receive early payments.
Both facilities will fulfill his business purposes.
As explained above, Lendingpot leverages on the experience of our network of relationship managers to create suitable loan solutions for SMEs.
With our wide network of partners, Lendingpot tries to ensure that there are suitable lenders for almost any SME business and loan purpose.
We stated earlier that we have over 100 relationship managers from over 45 financial institutions. We onboard multiple representatives from each financial institution.
This is done to minimise the impact of human factors on SME’s business loan application.
Multiple relationship managers and multiple financial institutions drive competition. This can lead to not only more competitive pricing for business loan products, but also better service even within the same financial institution.
If one relationship manager doesn’t respond to you, an SME would have other alternatives to choose from.
These are only some of the considerations that we have put into Lendingpot’s Business Loan Marketplace.
Our priority has been, and will always be, to make it easy for SMEs to do business and obtain financing in Singapore and no longer be constrained by the financing ecosystem.
Please don’t hesitate to talk to us if you have any questions!
Lendingpot.sg operates a Business Loan Marketplace that allows an SME to connect to multiple lenders with just one application, allowing the SME to know who its prospective lenders are and the rates that they offer, in a very short time.
Eric Koh is passionate about helping SMEs grow and has spent years interacting with business owners at OCBC and IFS Capital. He is interested in 70s rock ‘n roll, the odd novel and copious amounts of historical trivia.