OCBC has taken significant market share in a micro-loan scheme where the government covers most of the risk involved in the loans, a senior banker told The Business Times.
Called the OCBC Business First Loan, the scheme, which comes under Spring Singapore's Micro Loan Progamme, was launched in April last year. Tailored to a more cautious market, it offers new loans that are linked to the size of contracts that companies sign up for.
The collateral-free loan is given to companies - even young startups - with the government taking up 70 per cent of the risk of lending. The risk-sharing proportion was upped in 2014 from half.
"For companies as young as six months, we lend to them," said Eric Ong, OCBC's head of emerging business.
"This is something that is not done in the industry. Generally, for any bank to lend to any company, you must have at least two years of track record. But we are very prepared to go into it."
Businesses that qualify for micro-loans - to be used for purchasing equipment or meeting working capital requirements - must satisfy the following criteria: they must have at least 30 per cent local equity; post an annual turnover of under S$1 million or employ fewer than 10 staff; the group's annual sales turnover should not exceed S$100 million, or have more than 200 employees.
Eligible companies may be granted up to S$100,000 in financing with a repayment period of up to four years. The minimum interest rate is 5.5 per cent.
Sizeable market share
OCBC today has more than 50 per cent market share under this programme, and has lent to companies that are less than three years old. It sees double-digit growth ahead this year in this segment, Mr Ong added.
An OCBC survey of 400 startups and existing small business owners with turnover of up to S$5 million, conducted last year, showed that 50 per cent of the startups require funding to kickstart their business growth. Of these, eight in 10 need the money within the first two years of commencing business operations. Most of them need just up to S$100,000.
Only about 10 per cent of those surveyed have their financing needs met by banks in the early stage, suggesting there is still room for banks to come in.
Almost three in five of the companies rely on the traditional way that entrepreneurs raise money: from personal savings.
Some also take personal loans for their businesses, but Mr Ong said that might be unwise. Segregating those funds into a corporate account would help to keep the accounts clean and neat, he indicated.
And they can turn to banks which provide more appropriate credit assessment, Mr Ong said.
Shifting away from the old ways of financing their business may be timely now that new regulations aimed at cracking down on over-leverage via unsecured loans will limit loans taken by individuals, including budding entrepreneurs.
Companies that turn to Business First Loan cuts across all industries, with a slight skew towards business services and wholesale trade - a reflection of the larger make-up of Singapore's economy.
Business services account for 32 per cent of the client segment, while those in wholesale trade make up 21 per cent.
"Customers are a little more cautious (today)," Mr Ong noted. "They say, 'If I want to go into any contract, or any project, I need to know that I have sufficient margin first before I go in'," he said.
The bank is also offering contract financing through the Business First Loan to young businesses, which is not a common practice in this business segment.
Mr Ong said a business with a S$2 million turnover may secure a contract worth the exact same size as the company's turnover, but may have to reject the deal due to financing constraints. The bank can step in here to help.
The bank also provides invoice financing for emerging businesses - a form of trade finance.
OCBC expects to be able to separate the wheat from the chaff in lending to new businesses because of its long history in this business, beginning in 2006. It is a sponsor for the Emerging Enterprise awards for the eighth year running. The Business Times is an organiser of the event.
"Because they have an account, we can see the flows through their accounts. We know which are the ones that will be able to survive, because you know that the failure rate is very high for the segment," Mr Ong said.
That failure rate is at 50 per cent, he added.
OCBC's account for emerging enterprises - called Business First Account - draws in new businesses by having a low initial deposit of S$3,000.
Mr Ong noted that upcoming entrepreneurs are not - as is often perceived - young graduates. Most of them are in the 30s and 40s, plunging into a new venture after working for large corporations.
But he sensed that the emerging businesses have become more international in nature, as he has met more foreign directors than before.
Even as the flavour of Singapore's start-up scene changes, Mr Ong noted that new debt-raising platforms would not pose as direct competition for the bank.
"Especially for a high growth company, you can't just rely on one source of funding. You need a couple of sources of funding to fund your growth."
This article was first published on June 2, 2015.
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