Blue Sky - A look at financing options for SMEs

Q: Why is it a good idea for a business to expand abroad?
Venturing overseas can be an exciting and rewarding prospect for businesses, especially for SMEs (small and medium enterprises), that may face challenges such as increasingly high costs and a small domestic market in Singapore.

Expanding their business abroad gives them the opportunity to tap new markets and boost demand for their existing products and services. Manufacturing businesses may also benefit from cheaper sources of materials and labour.

But venturing abroad has its challenges. Firms have to contend with the unique business climate and practices, laws and regulations as well as social and cultural norms and traits of the countries they seek to enter.

This is where banks such as ours can play an instrumental role for customers. We make use of our global resources and network presence worldwide to provide our SME customers with detailed knowledge of the business dynamics in these markets. Our overseas offices assist and support customers who are doing business in that particular country. We also run a series of seminars to help our customers develop a good understanding of the market potential and business practices of overseas markets such as China, Vietnam and the Middle East, to enhance the prospects of their overseas ventures.

Q: What are the main challenges usually faced by a company that is looking to expand abroad for the first time?

Lack of cash flow and payment facilities, increased exposure to financial risks, unfamiliarity with local market conditions, and finding the right talent to support the overseas expansion, among others.

You need to understand the business and competitive environment of the target market. Without this critical knowledge, it is unlikely that a company can successfully adapt itself and replicate its local success. This in turn may increase the risks associated with the expansion.

Q: What do you recommend a company should consider in deciding if it is ready for such a move?

Venturing abroad carries a unique set of risks and potential complications. Before deciding to move into foreign markets, a company should first consider its overall financial position.

In order to successfully expand its business regionally or globally, the company must have ample financial resources to be used as working capital, either via internal reserves or through financial support by their bankers, or a combination of both options.

It also needs to ensure that it has managers who have the capacity to handle the complexities of new markets. This may involve reorganising employees, identifying suitable ones and training them to take on new work functions.

Operationally, a company must consider issues relating to administration, production, inventory management and logistics such as finding a suitable local partner or agent and having the ability to manage local governmental and administration requirements.

The company must also hone its marketing expertise which is an essential tool for a successful venture abroad. Previously successful local products and concepts may need to be adapted and customised to meet different preferences in overseas markets. For that to happen, a company may need to invest in market research.

Q: What are the main costs usually faced by a company that is looking to expand abroad for the first time? How do companies typically meet these costs?

The main costs would typically be capital expenditures such as set-up costs for new offices or factories. A company may also incur costs from investment study missions, due diligence exercises or the establishment of marketing offices, as a first step abroad.

These costs tend to be met through a combination of internal financial resources and longer term funding by financial institutions. Some companies may also qualify for government funding through schemes administered by IE Singapore.

Q: What sort of external financing options are available for such a company?

To help smaller businesses, the government has introduced Regionalisation Finance Schemes through our bank and other participating financial institutions.

With these schemes, the government shares credit risks associated with the loan, which are extended through the financial institutions.
Working capital financing is another facility that is popular among SMEs. Below are highlights of some working capital facilities commonly used by SMEs.

Overdraft facilities: A convenient and flexible form of short-term financing for immediate cash flow needs. Overdraft facilities are typically used by SMEs to pay day-to-day expenses such as telephone and electricity bills, petty cash payments or other routine operational expenses.
Receivable finance: Receivable finance is a good alternative source of financing for growing businesses. This service is commonly known as 'factoring'. Businesses convert their invoices into funds by 'selling' them to a 'factor', ie, a financial institution that provides receivable financing services. The factor may advance up to 85 per cent of the invoice value to the business. Once the factor has collected the full payment from the buyers, the balance of the invoice value will be paid back to the business. What is important in factoring is the quality of the receivables, which would determine how much the factor is willing to advance to the business.
Term loan: A fixed-term form of financing that can be used for the purchase of assets, capital expenditures or other projects integral to the growth of the business.

Another traditional approach is to raise funds through an initial public offer. However, this route attracts substantial listing fees and requires complying with listing regulations, which include disclosing details of the company's operations.

Loan products typically come bundled with other services to support a company's business needs. For example, our bank's Business Credit Express working capital loan facility offers companies the flexibility of an omnibus credit line, which may be used for overdraft, issuance of documentary credit - also known as letters of credit - trust receipts and banker's guarantees.

Manufacturers looking to expand their market and manufacturing base overseas may also find cross-border financial services helpful. In this instance, it is important for the company to choose a bank which knows the local market and is able to link the company's Singapore and overseas operations, with the necessary resources to help the business adjust to a foreign regulatory environment.

Q. What factors should a company consider before deciding on a particular financing option?
Ultimately, a company must consider the benefits and costs and ensure that these are aligned with its business needs. From a financial perspective, the company should consider the potential impact on its business such as whether it has enough cash flow to meet business expenses and repay its financial commitments. The company also needs to decide whether the choice of financing complements its future expansion plans in terms of new products and markets.