2023 SME Finance Accessibility Survey and Research

July 8, 2024

Table of Contents

Linkflow Capital operates a SME loan portal for users to compare their business financing options online instantly.

We have been aggregating data collated from our SME financing comparison platform since 2017. This report summarizes the data researched from January to December 2023.

Our key takeaway from 2023’s survey data:

“SMEs’ access to credit and financing has tightened considerably with a lower average approved loan quantum of $130K in 2023, down 42% from $224K in 2021. Borrowing costs have also spiked post Covid with average business loan interest rate of 8.16% in 2023, up significantly from a historical low of 2.50% in 2020.”

Interest rate for SME loans spiked significantly in 2023

We track the average unsecured SME loans interest rate movement within our platform across the last 10 years.

Average SME business loan interest rate spiked to a high of 8.16% p.a. in 2023. Interest rates tracked are for unsecured SME loans, and does not include secured loans with collateral such as commercial/industrial property loans, which bears lower rates than unsecured facilities.

The average bank processing fee for financing facilities secured via our platform was 1.40% in 2023, a 10% increase from average processing fee of 1.27% in 2022. Aside from interest, a one-time processing fee is also commonly charged by banks and financial institutions for granting financing facilities.

In 2020, we recorded a historical low interest rate of 2.50% p.a. Borrowing rates for SMEs have been kept low with MAS’s support during the Covid-19 epidemic. A MAS SGD facility [1] to participating financial institutions for government assisted loans helped eligible SMEs gain access to lower cost funding.

As Singapore exits the epidemic and with the unwinding of various government support measures, interest costs trended upwards from 2021 in tandem with higher borrowing costs globally.

MAS does not directly set domestic interest rate; it manages the exchange rate as its main monetary policy tool. Our domestic interest rate typically tracks the trend of global money markets, especially that of the US.

With the US Federal Reserve increasing its interest rates and keeping it at a 23 year high [2], we expect domestic borrowing costs to remain elevated for most of 2024. Interest rates might taper down gradually, albeit shallowly, from late 2024 and throughout 2025, if the US Fed starts rate cuts in the same period as predicted by most economists.

Average SME loan quantum decreased in 2023

The increase in interest rates has also affected average loan quantum. The average SME loan quantum approved in 2023 decreased to $130,236, continuing a downward trend from $184,345 in 2022 and down 42% from $224,398 in 2021. This consistent reduction over the past three years suggests some underlying factors influencing this decline.

Increased Borrowing Costs

SME loan interest rates are on an upward trend, reaching an average of 8.16% in 2023. Higher interest rates increase the cost of borrowing, which naturally may discourage SMEs from seeking larger loan amounts. The global rise in interest rates due to inflationary pressures and monetary policy adjustments has directly impacted the affordability of loans for SMEs.

Decreased Risk Appetite of Lenders

Post Covid-19, various government supported financing schemes introduced during the Covid-19 period were ceased. One such programme is the Temporary Bridging Loan, where Enterprise Singapore provided a risk sharing of up to 90% [3] to participating financing institutions.

Current government assisted financing schemes' credit risk sharing has dropped to between 50% to 70%. The maximum loan quantum under the then Temporary Bridging Loan was up to $1M in late 2022 before being discontinued. Current government loan scheme is capped at only $500K per company from 2023.

The unwinding of these government support measures might have result in lowered risk appetite of lenders in the SME financing segment, reflecting a decrease in average loan quantum granted.

With economic uncertainties, higher debt servicing costs for borrowers, and a heightened geo-political risk environment, lenders will likely turn more conservative, approving smaller loan amounts to mitigate potential defaults.

Breakdown of approved loan quantum

We’ve covered the increase of interest rates and corresponding decrease in average loan quantum. We’ll share more granular data below, on the breakdown of approved loan quantum within our platform.

More than half (54%) of loans originated within our platform in 2023 were loan quantum of $100K and below, an increase from 46% in 2022.

For higher loan quantum of above $100K to $300K, and between $300K to $500K, we’re observing a decrease in percentage share of all borrowers as well in 2023.

The only segment to buck the trend is loan quantum $500K and above, which increased to 4% in 2023 compared to 2% in 2022.

Total system-wide loans to businesses 2023

Let’s examine the broader data on total system-wide loans to all businesses in 2023. According to MAS’s data on total loans to businesses, business lending has declined YOY across the whole of 2023.

Source: https://eservices.mas.gov.sg/statistics/msb-xml/msb-statistics-history/Report.aspx?tableSetID=I.H&tableID=I.5A

This corroborates with our internal data on the decrease in loan quantum and weaker credit sentiment in 2023.

Total systemwide loans to businesses cover all business lending across all sectors, not just SMEs. For a more specific set of statistic relating to total SME financing loans in Singapore, we’ll refer to MAS’s Financial Stability Review report [4] for 2023.

From the graph above, we note that SME loans largely declined alongside the fall in overall resident lending in 2023. This statistic is in line with the narrative we’re seeing so far in our internal stats; weaker credit growth in 2023 compared to the previous year.

In the same MAS report, although outstanding SME loans has decreased, the number of SME customers saw an uptick.

Number of new business registrations

The number of SME customers increased in 2023 likely due to the sustained interest of businesses incorporating in Singapore.

We complied data extracted from ACRA (Accounting and Corporate Regulatory Authority) on new business formations across 2021 to 2023.

Data from ACRA [5] reflects that the number of new business registrations has grown to 70,402 in 2023, a 9.5% rebound from 2022.

The pickup in new businesses registered despite a backdrop of higher interest rate and a more restrictive credit environment might explain why banks and financial institutions continue to experience an increase in SME customers in 2023.

SME NPL (non-performing loans) ratio

A sharp increase in interest rate and debt servicing costs might be a precursor of financial distress for enterprises. Smaller SMEs are ill equipped to cope with higher leverage ratios due to weaker balance sheets compared to their larger counterparts such as listed companies or large corporates.

According to the prior cited MAS Financial Stability Report [4], the NPL ratio of SMEs remained stable at about 3.1% in 2023, despite the spike in borrowing costs in a more restrictive lending environment.

“Higher interest rates have had limited impact on asset quality so far, as seen from ‘persistently low’ non-performing loan (NPL) ratios.”
- MAS

Quoted [6] the central bank and regulator in their annual assessment of the resilience of Singapore’s financial system.

Some key reasons why Singapore’s SMEs’ non-performing loan (NPL) ratio remained stable despite rising interest rates:

Improved business sentiment over economic recovery expectations

Business sentiment in the manufacturing [7] and services sector [8] improved across 2023 right into 1^st quarter 2024, with more firms being optimistic about the near-term economic outlook and expectations of increasing hiring activities. The government’s strong policy support buffers, such as the Jobs Support Scheme introduced during the pandemic, helped cushioned SMEs from the wors of the crisis. These supporting policies positioned SMEs to capitalize on the improved business sentiment post-Covid.
Manageable impact of higher interest costs on SMEs

Although floating interest rates pegged to benchmark rates have increased, most SMEs’ outstanding debt are based on fixed interest rates. Loans taken during the Covid-19 period in 2020 to 2023 were mostly under government assisted financing schemes such as the Temporary Bridging Loan and SME Working Capital Loan. These financing facilities are generally on fixed interest rates over a 5-year term, reducing SMEs’ exposure to commercial floating interest rates.
Prudent risk management and robust credit underwriting by banks

Banks have proactively increased provisioning coverage since Q3 2022 as a pre-emptive response to potential rise in credit costs [6]. A separate special feature in the MAS Financial Stability Report, on the impact of Covid-19 credit easing measures on bank lending to SMEs, suggested that SMEs’ credit demand exceeds banks’ credit supply.

Even with high government risk sharing and ultra-low central bank funding costs, banks continued to practice robust and disciplined credit underwriting, with these support schemes presenting minimal moral hazard. SMEs with weak business fundamentals, poor credit profile and zombie firms are unlikely to pass muster with banks’ credit approvers, even with generous government financing support measures.

Application approval rate improved in 2023

Banks’ prudent and robust credit underwriting is evident through the loan approval rates we observed from our internal data. Approval rate for SME loan applications initiated within our platform improved to 76% in 2023, and remained consistent in the last 3 years, between 73% to 76%.

Approval rate shared here are based on our internal data extracted from clients’ engagements with our firm to procure financing facilities from banks and financial institutions.

What should be noted is that this approval rate shared in our study will not be representative of the actual approval rate SMEs might experience on the ground. We believe the general approval rate could be much lower.

Reason being as SME loan specialists, it is inevitable that we are more familiar with various credit underwriting policies and parameters in general than the typical SME business owner.

Therefore, for prospective clients whose credit profile we deem in our professional opinion might not meet lenders’ general minimum requirements, we will usually discourage from proceeding with formal loan applications.

For such cases, we will advise accordingly and suggest steps they might consider taking to improve credibility and approval chances in future.

Examples of such suggestions include improving business owners’ personal credit score by ensuring personal credit cards are repaid promptly over a period of time. Or implementing simple working capital strategies to improve positive cash flows, such as requesting longer credit terms for suppliers’ payments while offering small discounts to encourage earlier payments from customers.

Loan origination across lender types

Who are the lenders that are approving loan applications within our platform? We’ll share the breakdown on lender types and their respective share of loan originations.

Data for 2023 indicates a decreased share of loan originations for local banks within our platform, dropping from 70% in 2022 to 61% in 2023. This drop is attributed to the loss of market share to digital banks and alternative non-bank lenders.

Foreign banks’ market share of loans originated also decreased marginally, from 22% in 2022 to 19% in 2023. Notably, digital banks within our platform increased their loan origination market share by more than threefold from 5% to 17% in 2023.

Digital banks holding a Digital Wholesale Bank license can offer SMEs financing and banking services. The two digital wholesale banks are Anext Bank (subsidiary of ANT Group) and Green Link Digital Bank (operated by consortium between Greenland Group and Linklogis). Maribank (owned by SEA Group) who holds a Digital Full Bank license have also entered the fray in 2023 with their SME loan products.

We foresee that digital banks will continue to grow their SME financing books gradually while chipping away at incumbent banks’ market share. However, they are unlikely to make a significant dent [9] in the 3 local incumbent banks’ dominant position due to their wide retail banking presence, strong brand name recall and stepped up investments in digital plays over the past few years.

* “Others” financiers within our platform include alternative non-bank lenders such as P2P lending platforms, private B2B financiers, alternative lending fintech firms etc.

Average application to disbursement turnaround time

How long does banks and lenders take to process a loan application?

Within our platform, we observed that the average turnaround time from submitting a loan application to funds disbursement (for approved applications) took an average of 21 days in 2023. This is a marked improvement from 2022’s turnaround time of 28 days.

This increase in average processing time is largely attributed to new digital bank entrants with quicker loan application processing turnaround time. Without legacy overheads from older systems, digital banks built from the ground up are able to eliminate redundancies, digitalize and automate processes and achieve much faster credit decisioning.

Industry segments breakdown

Let’s look at the breakdown of the various industries users from our platform represent.

Sectors that formed the highest percentage of SMEs seeking financing via our platform include Wholesale Trading (16%), Retail Sale/E-commerce (13%), Food & Beverage (12%) and Construction (12%).

Most of our platform’s users and clients are from domestic facing sectors; retail sale, F&B and construction, with exception of the wholesale trading sector.

What’s notable is the higher percentage share of wholesale trading segment in 2023, at 16% of all users. Last year, the wholesale trading segment percentage share was at 13% in 2022, and 10% in 2021.

2023 is the first time over the past 3 years the wholesale trading industry formed the largest segment of our users, replacing the retail/e-commerce segment. We attribute this to the steady recovery of importers/exporters post Covid, as well the shifting in supply chains due to geopolitical uncertainties.

Users’ revenue profile

In 2023, revenue size of our loan comparison portal’s users increased slightly compared to users in 2022.

Users with the smallest annual revenue size in our study; annual revenue below $300K, formed the biggest share of respondents at 50%. This is a drop from 57% in 2022, with more users reporting higher revenues in the $300K to $1M bracket, and above $5M bracket.

This is an indication that the revenue of users in 2023 have increased. More specifically, the profile of users with higher revenue, as a proportion of all users of our platform has increased in 2023.

Correlation between revenue and loan quantum

Does the revenue of borrowers affect the loan quantum granted by banks? We extracted a statistically significant sample of our platform’s users who successfully secured financing. Their annual revenue and corresponding approved loan quantum were plotted on a graph.

We found that there is a direct correlation between the annual revenue of a borrower and successful approved loan quantum.

In general, SMEs with higher revenue typically qualify for higher financing amounts as compared to their smaller counterparts. This finding has been consistent over the past few years of our SME financing study.

Reasons why SMEs fail to access financing

The revenue of an applicant SME is not the only factor that affects financing eligibility and loan quantum granted. There are many other factors banks and financial institutions assess when considering a loan application.

For users within our platform that were unable to avail of financing in 2023, these are some of the common reasons:

40% fail to secure financing due to low revenue and weak bank balances
23% fail to secure financing due to being newly registered startups with short operating history
19% fail to secure financing due to weak or adverse financial performance (loss making, negative equity)
15% fail to secure financing due to lack of minimum 30% local shareholdings required by most banks
3% - Other credit adverse reasons

In our 2023 study, the main reason attributed to inability to access financing is “low revenue and weak cash flow”.

Most banks typically require SMEs to have some minimal revenue and healthy cash flow measured via bank balances maintained before considering business loan applications.

Different banks have differing credit criteria which will not be publicly published. While the 5 main reasons shared above for SME financing rejections are commonly corelated with rejected applications, they are not absolute causative nor definitive factors that determine whether an application will be successfully underwritten. Other variables and unique circumstances can also affect the status of financing applications.

Forecast and outlook for SME financing landscape 2024

Interest rate will remain elevated

We expect interest rate to remain elevated at current levels, but do not foresee further increases throughout second half 2024. Interest rates are likely to drop gradually from 2025, but we expect to it to be shallow and slow declines from early to mid-2025.

SME financing rates are typically “stickier” than most other lending products in other segments, such as property loans which tracks commercial pegged benchmark rates such as the SORA rate more closely.

SME loan interest rates usually move slower and adjusts in lesser relative degree against market lending rates such as the SORA rate. Even with anticipated US Federal rate cuts from end 2024 and throughout 2025, there will still be a considerable lag where SME lending rates start declining.

SME credit policies

We observed that more banks have been increasingly relying on programme-based credit models for the SME lending segment.

Such programmatic lending models apply a uniformly simplified and standardized credit criteria for underwriting SME loans. It is easier to originate loans at scale while reducing lenders’ acquisition credit costs, as it involves minimal product customization and manual intervention in the credit decisioning process.

These programme lending models could be further deployed at even larger scale when used in conjunction with newer technologies such as machine learning and AI. Notable recent observations we see for such use-case includes pre-approved business loans for selected borrowers.

This was relatively unheard of few years back. Lenders can now theoretically use some form of machine learning or AI to predict probability of default for existing borrowers or new-to-loan SME accounts via visibility to these firms’ banking account conduct and cash flow movements. This could then inform the system to automate and generate offers for pre-approved facilities to potential borrowers who meet the mark.

Another notable recent observation would be the advent of smaller ticket sized loans with minimal documentations. Some banks are reducing required documentations for loan applications with smaller loan quantum. Credit assessment is conducted via automated programme lending models, with a more streamlined process with less onerous documentations requested.

Lenders could be deploying this to deepen market share into the micro-SME segment. Traditionally, it might not be a compelling situation for lenders to target the most micro segment of SMEs, since the credit costs for originating smaller ticket sized loans would be higher proportionally than underwriting larger loans.

Micro SMEs also typically might not have the resources to provide documentations required by banks. Examples include smaller sole-proprietors who are not mandated to prepare full set of financial accounts, or one-man shops who transact with their personal accounts, with no corporate business accounts.

Banks are now more equipped to explore financing for the most micro sized SMEs who are traditionally a more underserved segment compared with their larger peers. With Singpass MyInfo to pull borrower’s information, automated programme lending models and digital onboarding technologies, it could make commercial sense for banks to avail financing to this segment.

A lower cap on the maximum loan quantum would be imposed, to mitigate lenders’ risk. With less documentations required, the entire application process could be automated further to reduce the need for manual intervention.

This could however still be at an experimental phase, and we’re keeping a keen eye on further developments.

Digital banks’ increasing market share

In 2020, MAS announced four successful digital bank applicants, including two digital full banks and two digital wholesale banks.

In our latest 2023 survey, the digital banks’ share of our platform’s loan origination increased to 17% of all loans originated, a more than 3-fold increase from 5% share in 2022. This is very close to the 19% share of loans originated from longer established incumbent foreign banks.

We foresee the digital banks continuing to chip their way in increasing market share of SME loans origination in 2024 and 2025, but possibly at a slower pace as incumbent banks continue to up their digital plays to compete and defend their SME portfolio.

GXS Bank is the only digital bank out of the four licensees who has not made moves into the SME financing market yet. Quoting from a Straits Times article [10] in April 2024, GXS is building its micro and SME banking business and will start serving this segment in 2024.

We are excited and looking forward to the entrant of GXS Bank since they have very solid franchises and SME base from both their parent companies, Singtel and Grab (via partnering merchants onboard their GrabPay and food delivery platforms). There should be many opportunities for synergistic plays for GXS in the SME financing space.

Summary

The 2023 SME Finance Accessibility Survey reveals significant shifts in Singapore's SME financing landscape. There are increasing challenges for SMEs in securing financing, primarily due to increased borrowing costs and reduced risk appetite from lenders.

The average loan quantum has notably decreased, with a concurrent rise in interest rates which will likely stay elevated throughout 2024 and most of 2025.

However, there are more financing options available to SMEs now, more than ever before, with the entry and ramp up in market share acquisition of the new digital banks.

Incumbent banks are also starting to innovate their products and processes to deal with this competition, with more financing opportunities available now for underserved sub-segments such as micro-SMEs.

Moving forward, SMEs should continue to focus on strengthening competitiveness, improving productivity, and deepening digital capabilities to navigate the evolving financial landscape.

As interest rates are expected to remain high, proactive financial planning and leveraging alternative financing solutions will be crucial for SMEs' sustained growth and competitiveness in 2024 and beyond.

Research methodology

This study employs a quantitative approach based on data collected from our SME financing comparison platform. The methodology encompasses the following key aspects:

Data Collection: We aggregated data from 2,466 unique users of our SME loan portal between January and December 2023. We also included internal data from clients’ financing engagements within our platform for the same period.
Data Cleaning: To ensure data integrity, we implemented a rigorous process to remove duplicate entries and filter out spam submissions from the database.
Sample Characteristics: The dataset comprises self-reported information provided by SMEs seeking financing options. It's important to note that the data was used "as is" without manual verification of individual entries.
Data Analysis: We conducted statistical analysis on anonymized and aggregated data of our internal financing applications to derive insights into SME financing trends, loan approval rates, interest rates, and sector-specific patterns.
Anonymization and Aggregation: All internal statistics were anonymized and aggregated to generate summarized insights, ensuring the privacy and confidentiality of individual user information, while adhering strictly to the Personal Data and Protection Act 2012 (PDPA).
Limitations: While this methodology allows for a broad overview of SME financing trends, it relies partially on self-reported data and may not capture the full spectrum of SME financing activities in Singapore.

This approach enables us to compile a comprehensive snapshot of the SME financing landscape in Singapore for 2023, offering valuable insights for stakeholders as well as SMEs.