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Access to working capital has long been one of the main challenges of small and medium-sized enterprises (SMEs) in Asia. 
Despite making up over 96 per cent of businesses in the continent, SMEs tend to face high obstacles when seeking out traditional forms of financing. 
They may be perceived as a higher financial risk by banks, or may not have the standardised accounting practices and credit scores that traditional financial institutions require.
As a result, many banks require extensive collateral from SMEs. These are sometimes business-critical assets, such as the property business is conducted in, or the vehicles used for business operations. If such assets are seized when an SME fails to pay back a loan, the business may never recover.
However, today SMEs have improved access to working capital through alternative financing options. In Hong Kong, a combination of fintech innovation, government support, and openness from banks has opened up a range of new avenues for SMEs to access funds. 
 
Government grants
Depending on the jurisdiction, many governments have schemes that promote SME lending. In Hong Kong, the provision of Working Capital Loans was enhanced under the Budget 2019. 
Under the SME Financing Guarantee Scheme operated by KMC Insurance, working capital loans of SMEs can be insured against default, thus making banks more willing to lend to these companies. 
The government has reduced fees to guarantee SME loans by 50 per cent, increased maximum loan quantums to HK$15 million (US1.9 million), and lengthened the loan guarantee period to up to seven years. 
In Singapore, the government has an SME Working Capital Loan scheme, in which it will guarantee repayment of half the loan in the event of default (for business loans of up to $300,000). This is complemented by a micro loans scheme for smaller amounts.
Other government schemes include support for applied research and development programmes through Hong Kong’s Innovation and Technology Fund. There’s also the Patent Application Grant and the SME Export Marketing Fund. Meanwhile, the Hong Kong Trade Development Council offers several start-up funding schemes.
As these examples show, the type of grant and amount of funding largely depend on the reason for seeking out a loan. SMEs need to take note of the eligibility requirements for each funding scheme. 
Alternative lending platforms 
Alternative lenders, such as InvoiceInterchange and Validus, as well as peer-to-peer lending platforms like  MoolahSsense and Funding Societies, directly connect interested lenders or investors with SMEs looking to raise funds. Some sites allow investors to pick from a range of screened SMEs, while others strategically allocate investors’ funds to different borrowers. The investors earn interest on the repayments.
Through alternative lending  platforms, SMEs can get unsecured loans without having to go through the usual hassle of bank applications. Approval times are quicker and businesses can borrow smaller amounts that they typically cannot obtain from banks. 
Many such platforms today are fintech businesses, which means they leverage technology to optimise their processes. This includes integrating with cloud-based accounting software, such as Xero, to allow SMEs to send the necessary financial records with just a few clicks. This process improves the speed at which loans can be approved, and the funds disbursed (the more traditional process is deeply involved, with lenders taking days to “check the books”).
Access to clear, accurate, and updated financial records also gives some lenders the confidence to increase loan quantums, or provide lower interest rates due to a more accurate perception of risk. 
These alternative loans  are ideal for SMEs that cannot risk putting up business-critical assets, such as machinery, as collateral for standard bank loans.
Revenue-based financing
Revenue-based financing (RBF) is a way for SMEs to raise capital without surrendering equity or taking on debt. Through RBF, investors receive a percentage of the SME’s gross revenue in return for their invested cash, up to a maximum amount. 
For example, an SME might agree to pay 8per cent of gross revenue to an investor, until it has repaid 2.5 times the initial amount of cash invested. As this is not a loan, there is no fixed repayment and no interest rate. While there is no equity surrendered, investors still have an interest in how well the company performs, as it affects their returns. Investors are hence inclined to use any leverage they have to assist the business. 
The downside is that SMEs have no definite idea of how much they’re actually paying until the sales figures come in. The total amount repaid – however long this may take – may also end up being more expensive than a conventional loan in the end.
RBF is an especially popular method of financing for innovation-driven SMEs that need high initial funding, but cannot risk interference by shareholders or partners who may not understand a new, unprecedented product or service. 
RBF can be tied in with transactional data and machine learning technology. For example, some such services use transactional data from Point of Services (POS) devices, to record daily sales. Through machine learning, patterns can be identified, and appropriate loan options are pushed through to the client. 
Venture capital funding
Venture capital (VC) funding is private equity funding that takes place over several rounds. The seed round is when investors put in the initial funds required and is a high-risk stage for which venture capitalists expect significant equity. This is followed by subsequent funding rounds.
After each round of financing, the SME is expected to meet certain milestones. Failure to do so can lead to investors pulling out in subsequent rounds. 
VC funding brings a lot of direct involvement from the investors. In fact, many SMEs seek VC funding not simply for the cash, but for the expertise and influence of the VCs themselves, who can use their connections to help the business grow. 
It’s tough to raise VC funding, though, especially for companies that don’t have their financial books in shape. A Stanford study found that VCs typically consider 100 companies for every start-up they choose to fund. VC funding is also poorly suited to SMEs that want total control over business decisions. 
Angel investing
Angel investors are usually affluent individuals who choose to invest directly in an SME – think Shark Tank, the American reality television series. While investments are typically driven by financial interests, angels may also have other compelling reasons for investing. For example, “impact investors” may want to invest in companies that they see as contributing to social good. 
As such, the reasons –and demands – of an angel investor may be much wider than an SME can expect from VC funding, RBF, or other forms of financing. As with VC funding, this is not suitable for SMEs that desire total control, as they may have to cede partial – or sometimes even majority – ownership to the angel as a condition of funding.

Retail-based crowdfunding 
Although P2P lending is a form of crowdfunding, there’s an alternative form made famous by sites such as Kickstarter. Using this model, an SME seeks funding from a wide public who have an interest in seeing its product or service come to fruition.
The investors don’t typically expect financial returns, but will be the first to receive the SME’s product or service. This may come with some form of customisation or bonus products.
While apparently “free”, this is a slow and demanding way for SMEs to raise funds. Significant efforts must go into marketing the product or service that may not yet exist. It’s a great way to gauge market demand, though, and to build funds for production.
 
Thinking beyond business term loans
Thanks to fintech innovation and regulatory sandboxes that support pilot trials of new financial products or services, SMEs today have a wider range of options for accessing working capital. 
The key is for an SME to identify both its funding goals and capacity to pay back loans. 
When raising capital, it’s important for businesses to have a strong grasp of their financial position, understand their cash flow challenges and be aware of the alternative financing options available in their country.
 


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Xero

XERO

6 ways SMEs can access working capital through alternative financing

The rise of fintech has opened up a range of new avenues for SMEs to generate working capital

Besides seeking funding from financial institutions, SMEs should also keep an eye on government grants as a way to fund their operations

Revenue-based financing can be utilised with machine learning technology, allowing it to give SMEs access to appropriate loan options.

With the Internet, SMEs can also seek funds from investors around the world through various crowdfunding platforms.

Tech


When seeking financing, small businesses often require collateral as they are traditionally seen as high financial risk by major lenders
Fintech innovation, government support and greater banking openness help generate variety of new funding avenues 
	 



When seeking financing, small businesses often require collateral as they are traditionally seen as high financial risk by major lenders


On a cloud: Grow your business

6 ways SMEs can access working capital through alternative financing

When seeking financing, small businesses often require collateral as they are traditionally seen as high financial risk by major lenders Fintech innovation, government support and greater banking openness help generate variety of new funding avenues

When seeking financing, small businesses often require collateral as they are traditionally seen as high financial risk by major lenders

Fintech innovation, government support and greater banking openness help generate variety of new funding avenues