2020 will go down in history as a unprecedented and uneventful year for almost all small businesses globally. Covid-19 have wrecked havoc across the world and Singapore, being a small and extremely trade dependent economy is definitely not spared the carnage from the fall out.
Facing what could be the worst recession in history, economists have predicted 150,000-200,000 job losses in Singapore caused by Covid-19 and the current partial lock down we’re in.
Even more mature or bigger SMEs which are well capitalized have been feeling the pressure of the downturn as it affects almost all sectors of business, disrupting global supply chains, financial markets and dampening both domestic and global demand.
In the development life cycle of small businesses, it is inevitable to go through cyclical and structural downturns. The current downturn though is akin to a black swan event and will stress test SME’s business contingency plans (or lack thereof) to the max.
However, for SME owners whom are agile and resourceful, the downturn might not all be just doom and gloom.
Good business leaders are adaptable and able to pivot nimbly according to circumstances.
To find the silver lining within the current dark recessionary clouds, the SME owner must be willing to accept that change is a constant in both business and life, and be prepared to seek new directions.
In a slow down, the SME owner must be extra mindful of your company’s cash flow position at all time.
Prepare well ahead of time if you require to apply for a business loan to improve working capital position or to take advantage of opportunities. Always plan your loan application in advance as banks credit will tighten in a sluggish economy. SME loan applications have already surged to multiple folds and with the partial lock down in place, be prepared for much slower processing time.
Lower consumption, economic depression and tightening credit access are in fact not a recipe for disaster. In fact, within the pessimistic outlook might lay opportunities for those whom hustle hard enough and able to look at the bigger picture that is developing.
Within every crisis lies opportunity, specifically the below 4 opportunities.
1. Intensity of competition is reduced
In a recessionary period, most companies will likely fall back on a defensive posture by suspending investment, cutting costs and retrenching staff.
There will be fewer new entrants into the marketplace as well as most will be spooked by the climate and opt to postpone their market entry till when they deem “times are better”.
As a result, the intensity of market competition is significantly reduced in the backdrop of an economic slowdown.
Most Singapore SMEs are in homogeneous markets with high competition. In certain industries, GLCs (Government Linked Companies) dominate the market with seemingly insurmountable odds for the small boy.
However when market competition is greatly reduced, a resilient SME could chisel in to find a market entry point in a particular niche.
When the market recovers, the companies that managed to weather the storm could find themselves in a dominant position in their respective market niche.
2. Marketing efforts stands a chance to gain consumer’s mind share
As consumers, we are bombarded with ads and marketing messages every single day. From Facebook, billboards, search engine ads to your traditional mass media.
During good times with strong domestic wage growth and low unemployment figures, brands will outdo each other going full throttle on their marketing budget.
In a recessionary period, most companies will instinctively cut back on costs including marketing and promotional activities.
With the reduced marketing messages and brand mentions, the market environment will become relatively quiet.
For a small SME, a modest $20k-$30k branding and marketing budget will probably be a drop in the ocean during the boom period. You’ve got to be very creative in your market positioning and brand messaging to be heard above the rest.
During a downturn, this marketing budget will likely allow you more options and platforms to spread your message to your target consumers. You can also practice customer segmentation in your marketing efforts to redirect more marketing budget on higher ROI customers.
Traditional media like TV and papers will offer discount packages which are usually not offered during good times.
You can also run Pay-Per-Click (PPC) online marketing advertisements and likely get more bang for your buck. As most popular PPC platforms such as Google Ads works on an auction basis, demand of online traffic from advertisers greatly tilt the costs required to run a profitable ROI campaign.
So, any economic depression is the best time for you to press on with your marketing campaigns to grab a bigger piece of your target consumers’ mind-share.
3. Take advantage of consumer disenchantment
Again, in a recessionary environment most companies will cut their least profitable product lines, reduce value add services (due to lower headcount) and stop investment in R&D or coming up with innovative new products and services.
However, when those companies do so, their consumers and clients whom are used to the previous standard of service rendered will naturally be disenchanted. When consumer experience is negatively impacted, dissatisfaction with the company and its brand will follow.
This is a great opportunity for the nimble SME whom is able to take advantage. Consumer discontent is an opportunity for you to penetrate new key accounts that were previously closed to you.
As we can see in the rapidly sharing economy, the rapid rise of new market entrants in very traditional industries such as Grab in the taxi industry are due to the smaller new entrant exploiting consumer dissatisfaction with the incumbent.
Imagine if you’re a manufacturer that is not able to gain access in the supply chain of a big MNC you’ve courted multiple times due to your lack of branding and stature.
Now, if the current supplier of your targeted client decides to cut back on their logistics and customer service support due to the slowing economy, and the client is dissatisfied with the drop in service levels, what should you do?
The answer is obvious. This is the best opportunity you have to gain a new key account by doubling up your service value propositions and product offerings to take advantage of the target client’s dissatisfaction with their current vendor.
4. Overall business costs are down
During a recessionary slowdown, most cost of businesses will also tend to fall as suppliers drop prices in a bid to shore up demand.
You’ll find that direct costs of materials might start dropping as suppliers start to offer volume discounts or early payment discounts.
This is also the best time to renegotiate business premise lease renewals with your landlord as you’ll have better bargaining power.
Banks whom might usually tighten credit lending during a downturn might also offer better lending rates for their current loans to high quality borrowers. Make sure to keep your credit rating pristine and clean so you’ll have more bargaining power when negotiating business loan interest rates with your banker.
Most importantly, the cost of labour will tend to go down as well. With rising unemployment rate and sluggish hiring across the board, talents that were previously averse to working in smaller companies might become available with the right remuneration package.
This is a right time to beef up your talent acquisition and retention policies to attract talent with the right cultural fit. No business can ever hope to scale without a talented team of committed players. With the Government’s Jobs Support Scheme to help SMEs defray a portion of their local staff costs, businesses could enjoy some succor during this challenging period.
Some of your competitors whom have weaker holding power may call it a day. They may start to conduct fire-sale of their inventory at bargain prices or you might come across experienced industry candidates whom were let go of by their defunct companies.
Take every opportunity to sniff out potential deals during a slowdown and you might be better positioned than most to grow during the recovery phase that will follow.
Access to financing in an economic slowdown
In a deteriorating economy, it is no surprise that banks and financial institutions will take a more conservative view in credit underwriting.
It is a given that SMEs are not as well capitalized as large corporates and MNCs and will find it even more taxing to tide through the slowdown.
Financial markets are still sloshed with excess liquidity from central banks’ monetary quantitative easing exercises. Global interest rates remain depressed due to the credit liquidity.
Rates are forecasted to gradually increase as economists expect the US Federal Reserve to announce rates hikes to tame inflation. Singapore’s lending rate moves in close tandem with US lending rates and is also expected to increase following any moves from the Fed on rates hike.
This double whammy of tougher access to bank financing as well as higher interest costs could potentially tighten the noose around the SME which is not sufficiently capitalized.
Cash flow is the life line of all businesses and access to credit facilities is vital for today’s SME to tide through the downturn while undertaking internal restructuring to improve productivity, enhance processes and revamp itself to adapt and thrive in current market conditions.
Without access to financing, local SMEs would also find it hard to expand beyond our borders and heed the call from the government to internationalize and seek opportunities overseas.
Within this challenging credit environment in business lending, SMEs can undertake the below 4 ways to tap into financing if they are facing issues with securing business loans:
Personal bank loan
SME owners whom are not able to meet the banks increasingly stringent credit underwriting criteria for business lending can turn to personal loans from banks instead. Personal loans generally have less red tape compared to business loans as banks will only analyze the director’s personal credit history and conduct and not the company’s financials & cash flow.
If the company’s financial reports are deteriorating and cashflow is weak, it might be tough convincing bank’s credit underwriters to approve a business loan application. If the director’s personal credit history is still healthy, banks’ personal loans can be an alternative.
However, personal loans are recommended only if the company has no other means to qualify for business loans and just require a quick cash injection of a small amount to tide through a short period of cash flow crunch.
Some personal loans bear higher interest than business loans and quantum extended are typically much smaller than business loans. If the director of the company approaches too many banks in the same time frame to raise the required amount of financing through personal loans, his/her personal credit score could be adversely impacted, resulting in even lower chances of approval for future business loan applications.
MAS has also tightened policies in personal unsecured credit limits limiting individuals’ unsecured personal credit limits across all banks not more than 12 times monthly income from June 2019.
High gearing in personal loans might also affect refinancing of your existing personal residential property loans with the MAS TDSR (total debt servicing ratio) policy that mandates an individual’s total personal credit monthly commitments not crossing 60% of monthly income when banks assess property loan applications.
For SMEs in high growth industries such as tech development, e-commerce, pharmaceuticals or logistics, equity crowdfunding is another alternative to business loans that can provide that much needed capital to fund expansion plans.
For SMEs whom are in more traditional industries and less likely to attract equity investors, another new innovative way to access funding that is gaining traction in Singapore is P2B crowdfunding.
These crowdfunding platforms act as aggregators to list suitable companies’ funding requests on their online platform to a group of retail investors to fund the business loan applications.
Crowdfunding platforms seek to fund the segment of under served SMEs whom mainstream banks might not be able to finance. As the credit underwriting of some of these crowd funding platforms are less restrictive than the banks, the chances of securing an approval here might be higher.
The con is higher costs of financing generally compared to SME loan interest rates as investors demand higher yield of return from the higher risk they undertake in funding applications.
For SMEs facing rejections from banks on business loan applications, factoring is another tool in the funding tool box. Businesses selling to other companies on credit terms are suitable for factoring.
In a factoring arrangement, invoices to business customers that are unpaid can be factored to a financier whom typically can advance cash to you up to 80% of the invoice value.
This method of financing works best if your receivable books consist of mainly large corporates, listed companies or statutory boards with long credit terms i.e. more than 30 days.
For factoring, the financier is primarily concerned on the credit quality of the invoice they are buying over instead of just solely assessing the borrowing entity’s credit profile.
This method of financing is again less stringent on credit underwriting compared to traditional unsecured business loans, if the credit profile of the borrower’s debtor is strong. The drawback is the financing can only come in towards the final stage of the supply chain after goods or services have been sold and pending payment.
Tap into government financing schemes
The Singapore government recognizes the importance of SMEs in our economic development. There are many grants and financing schemes in place that aim to encourage a vibrant and strong local SME sector.
Most of the government assisted financing schemes are administered by Enterprise Singapore, a government body with mission to assist SMEs in their growth. Most of the financing schemes administered under the Enterprise Financing Scheme has some form of risk sharing between the Government and participating financial institutions.
The purpose of these financing schemes with risk co-sharing is to encourage banks to increase credit lending to SMEs especially during an economy slowdown as banks grows cautious with SME lending, traditionally considered to be of higher risk.
Within every crisis will always lay opportunity for those who are prepared.
Contrarian thinking if applied appropriately will lead small businesses to reap huge dividends during an economy slowdown.
When everyone is retreating, study your options impassively and take a leap of faith if the odds are in your favor. Instead of following the herd blindly, do the opposite and your hand could be significantly strengthened during the next economy recovery.
In 1998, as the financial crisis swept through Asia, the majority of enterprises reduced investments.
Samsung took a contrarian approach and increased investments in Asia, in one fell swoop it became a leader in the multiple verticals it was competing in.
In 2009, the global financial crisis spread to China. Without exception, most companies again cut investments and reduced exposure to the market. But Kentucky Fried Chicken did the opposite.
They instead increased investments in China and as a result, consolidated and enhanced their market leading position today.
SMEs are not constrained by size and bureaucracy of larger companies. It is the natural advantage of a smaller company to stay nimble and react faster to changes in the external market.
Take full advantage of being agile and look out for the opportunities that present themselves during difficult times.