Proven Strategies to Survive Singapore’s Tough SME Credit Environment
Proven Strategies to Survive Singapore’s Tough SME Credit Environment: Singapore is placed 12th in the world ranking of ease of access to credit. This is quite impressive although investors should be aware that individuals and firms’ information exceeding five years does not appear in the credit reference bureaus. The last economic downturn, coupled with the limited credit information caused a shift in the willingness of SME’s to give credit.
According to a survey by the DP information group the leading challenges that SME’s face include slower sales, increased competition and delays in getting paid. In response to this, SME’s tightened their credit terms. SME’s have reduced the Days to Cash (DTC) by as much as 19 days compared to a similar period in 2014 as seen in the chart below.
Source: DP Group
This means that suppliers are less willing to extend generous credit terms and would force you to finance your operations from alternative moneylenders which would, in turn, reduce your profitability due to increased financing costs.
You do not have to take this route. Below are proven strategies which firms have adopted and cope with the tight credit environment.
Tightening Trade Credit Terms
To circumvent the anticipated cash flow hiccups, SME’s can respond to tighter credit by cramping their trading terms. You can demand larger deposits or shorten the credit period. This creates a domino effect initiated by the larger credit company and ending up causing cash crunch at the consumer’s side which eventually has an adverse effect due to the reducing demand.
More Credit Scrutiny
To avoid being hang up with lingering bad debts in your financials. Also, you can intensify the credit scrutiny and threshold of your clients. You can go about this by undertaking further peer reviews of prospective debtors or stipulating a minimum trading period before you extend any form of credit. The downside is that you may end up with a contracted customer base.
Invoice financing offers an excellent opportunity to meet both your needs and the customers’. This is when you approach an externally licensed moneylender to advance a loan. Which is mean to bridge the credit you have extend to your client.
Its main downside is the reduced profitability due to increased financing costs. To counter this, you can negotiate for a long term facility with your preferred moneylender. And this might lower the interest cost. After that, categorize your clients and apply a financing cost to those who want credit. This is either with little or no notice versus those notify you of their intent to seek credit. This will help you bag the right opportunities while not tying down your capital.
To conclude, it is inevitable that for an SME to grow it must borrow and it must make a profit. The tightening credit environment calls for all entrepreneurs to be more creative. And to employ strategies as mentioned above so that they can prosper.