If you are an entrepreneur, then you know the feeling…
At some point in time, this is a thought that has surely crossed the mind of every entrepreneur in Singapore:
“Time to start thinking outside the box and look for sources of alternative financing.”
It is tough for new companies who are in need of funds. Banks have started crunching down on their exposures and become conservative, requirements and conditions are getting tighter and more stringent, and few investors are willing to exchange their money for equity in companies.
However, with the rise of innovative technology, comes the rise of FinTech firms, who are becoming aggressively popular as sources of alternative financing.
Let us explore some of these ingenious options:
1. Peer-to-Peer (P2P) Lending via Crowdfunding
Peer-to-peer lending platforms act as marketplaces that match-make businesses that are looking for financing, with retail investors who are willing to lend in exchange for interest.
Banks and institutional lenders are completely out of the picture. A simple online platform and a few Relationship Managers are all that facilitates this process.
In essence, the idea of crowdfunding was initiated as an avenue to connect the retail public to businesses or projects that needed funding. It offers everyone a chance to fund a project or business via an investment or loan that gives them equity or interest in returns.
More than that, it also provides a space for business ideas to gain traction and spread awareness. With the unlimited reach of the internet, entrepreneurs who have brilliant idea can now have access to significant amounts of funds if they are able to convince the general public of its brilliance.
Crowdfunding also provides retail investors with first access to fresh and innovative products or services. It also helps that in recent years, the crowdfunding industry has grown in significant proportions across the globe as a great source of alternative financing.
The only set-back to this relatively new industry is that because of the limited amount of time that it has been around, proper rules and regulations are still not completely in place to govern the industry, which would mean that both investors and businesses are still susceptible to a certain amount of risk.
However, given time and exposure, we can expect that there will be concrete regulations set up across the crowdfunding space.
We all know the struggles that young companies face in obtaining small business financing, and how the banks tend to stay away from lending to companies that are under 2 years of age.
However, the good news is that if the loan quantum that a young company seeks is small, there are lending programs that have been initiated by the Singapore government to help newly incorporated small medium enterprises to get access to business loans of up to $100,000, with extremely attractive interest rates and conditions.
Two such financing schemes are the SPRING SME Microloan and the SPRING SME Working Capital Loan.
4. Invoice Financing
For companies that are unable to portray sufficient financial strength to the banks, do not have collateral of any sorts, or simply do not meet the stringent requirements, do not be dismayed!
A good alternative source of funding – invoice financing.
So check this out:
If your company happens to bill and invoice clients on credit terms of between 30-120 days, you can sell your invoices to your local invoice financing houses.
Essentially, the invoice financing company will buy over your unpaid invoice; providing you with cash up-front – usually up to 80% of the invoice value.
Once your client has made payment, the invoice financing company will return the remaining 20% to you, less the interest rate charged.
Most companies tend to use invoice factoring as a short term source of funding because interest rates tend to be slightly higher than getting an unsecured business loan from the banks.
A pretty decent source alternative financing we reckon.
Better to pay a small interest fee for cash upfront, than to lose your entire business because of a temporary jam in your cash flow.
5. Equity Financing
In equity financing, businesses will have to give up a portion of the company’s equity in exchange for an investment.
While most people have a tendency of thinking that raising capital through debt seems like the more logical option, they also tend to overlook the value that a venture capitalist or an angel investor could bring to the table.
To name a few benefits, a good venture capital firm could have access to a lot of precious resources that an SME might not have access to – such as a wide network of other business partners, or a significant amount of business experience in a myriad of industries – which they could provide to an SME in the form of good advice or foresight.
In some cases however, there have been situations where institutional investors try to enforce control of the directions of the company, which have led to disastrous outcomes.
Either ways, equity financing is always a viable option for alternative financing which can lead to greater heights for a business.