Major Challenges Faced by Small and Medium Enterprises in Asia
Last 2 years were challenging for most companies, and especially harder for some. Last year, companies from almost all industries, ranging from clothing retailers, travel companies and many others have borne the brunt of lockdowns all over the world. Popular names in the lights of Hertz, Brooks Brothers, J.C. Penney, Gold’s Gym, Virgin Atlantic etc. have shut their doors due to financial losses or bankruptcy.
Closer to home, Singapore businesses are not spared of this unprecedent event. Robinson, once Singapore’s popular retailer, closed its last outlet in the country in Oct 2020 after struggling to manage disruption in the form of e-commerce retailers.
Importance of SMEs in Asia and Singapore
SMEs are the growth engines for much of the world’s economies – being sources of innovation, development, and jobs. They represent around 90% of businesses and more than 50% of employment worldwide.
According to the World Bank, 600 million jobs will be needed by 2030 to absorb the growing global workforce, making SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create 7 out of 10 jobs.
2021 survey from the Singapore Department of Statistics show that our local SMEs account for around 2/3 of the employment constituting to 99 percent of all enterprises. They contribute to just short of $148billion (S$200 billion) of the economy, translating to nearly half of the country’s gross domestic product.
Challenges Faced by SMEs
With the evolving situation of the pandemic, businesses are facing with new challenges unlike other times. Limited access to finance, lack of digitalization, failure to innovate, low research and development (R&D), expenditures, undeveloped sales channels, and a low level of financial inclusion are some of the reasons behind the slow growth of SMEs.
Shortage of resources (finance, technology, skilled labour, market access and market information);
Increased market competition and concentration from large multinational enterprises caused by globalization and economic integration;
Inability to compete against larger firms in terms of R&D expenditure and innovation (product, process and organization);
Lack of economic of scale and scope;
Higher transaction costs relative to large enterprises;
Lack of networks that can contribute to a lack of information, know-how, and experience of domestic and international markets;
Economic slowdown / Slow recovery.
SMEs: The Finance Gap
Stable access to appropriate funding sources is an important factor for the survival and growth of potential SMEs. However, most SMEs face poor access to finance in the region`s bank-dominant system and they are rejected due to the following reasons (not exhaustive):
Young market history
In the present economy, new start-ups or millennials often have little or no credit history. Therefore, these young adults or businesses often borrow from friends and family when they need financial aid.
Small ticket loan size
Not everyone is fortunate enough to get financial aid in times of need. Traditional systems often do not entertain small loans amounts because of high underwriting costs, smaller profit margins and rigid banking regulations.
Short tenors
Not everyone is fortunate enough to get financial aid in times of need. Traditional systems often do not entertain small loans amounts because of high underwriting costs, smaller profit margins and rigid banking regulations.
Insufficient or lack of required business documents
The credit scoring systems of most traditional banks are not suitable for SMEs. There is a lot of overhead with conventional scoring systems. SMEs often do not get access to credit because of this system. Some issues include extensive documentation, high-interest rates, and long decision-making times.
Unfavorable financials
In most new business ventures, it is very rare for everyone to have stable favorable financials during the initial first 2 to 3 years of operations. With the rigid credit requirements of traditional lenders, most young enterprises would not have access to funds they need based on inconsistent financials.
New solutions for SMEs in a new economy
Since the beginning of this decade, global business practices have shifted and technology have changed for the financial services. By the next decade, banking can look drastically different for both consumers and businesses.
In the new digital economy and post pandemic era, SMEs should be empowered with innovation in finance services to focus on their growth and expand their financial accessibility.
With the revolution of technology, now alternative data are easily available on consumers and businesses. Harnessing alternative data on top of some basic traditional data, our credit solutions can empower SMEs, unlike how traditional lenders would with new solutions for the new economy.
CrediLinq.AI has the tools to help you run your business – on your terms. We help you gain clarity on your business cashflow and health so that you can maximize your business opportunities when they come. See how CrediLinq.AI works and get more expert guidance for the next era of small businesses.
