The coronavirus, or COVID-19, has been declared a global pandemic by the World Health Organization. It’s an uncertain time with lots of unknowns, and while we don’t have all the answers, we want to share what we know and give our customers and other small businesses some advice that might encounter changes in their market.
In the last month, my company has been helping more than 100 SMEs plan out their cashflow to survive this current situation.
Let me highlight again how this current COVID 19 issue is causing many SMEs to face the following cash flow issues:
1. Project / Order cancellations
This results in companies losing revenue, some of which are forecasted to be used for salaries or recurring purposes like utility bills, rental (thankfully our govt stepped in to address this issue), CPF, tax, etc.
Some companies, like those in the Event / Catering industry, may have already incurred sunk costs (which may or may not be refunded).
2. Buyers are not paying on time
This will result in an even bigger problem for their cash flow. Some companies could have forecasted these monies to be in and have already earmarked it for certain purposes like a new project (small problem) or mandatory expenses such as salaries / levies / cpf / gst (big problem).
3. Suppliers are chasing for payments
With a lack of liquid cash, companies could be facing problems to pay their supplier, which in turn causes problem #2.
Some suppliers may initiate legal action (thankfully this has been addressed in Parliament too) but the suppliers can always cut the suppliers to a company, rendering them no way to do business.
Let’s focus on the Govt 3 Budgets (Unity, Resilience and Solidarity) for SMEs and how it helps the current SMEs
Thankfully, the govt announced during the Unity Budget speech on 18 Feb that the govt is encouraging the banks to lend more money by bearing 80% of the risks of the $600k Cap.
The Resilience Budget on 26 March increases the limit from $600k to $1m. And most recent solidarity budget, the govt increased their risk share to 90%.
However, SMEs must understand that this is still subjected to individual banks’ approval. And Banks DO NOT want to lend to unqualified borrowers.
Unqualified borrowers are classified as:
1. Having a poor credit score
2. Poor maintenance of their bank statements
3. Having too much borrowing or debts
4. Not falling in line with the Debt Servicing Ratio or Loan Stacking
What SME owners need to understand about the MAS Loan Package?
The key points for SMEs to note are:
- This is a Loan with obligations to repay and not a handout. Although the rates are at an unprecedented low, Business owners still have the responsibility to plan their own finances to solve their current cash flow issues and future repayments.
- Business owners should not apply for deferment of payment unless necessary. Deferment of payments, although is good for cash flow planning, could impact loan applications and will also result in additional interest. Business owners have to do their sums before applying for a loan and not because it is an easy way out.
- Business owners should also take a further view and be disciplined in their spending. Practice prudent spending and ensure that employees are not laid off as re-hiring and re-training could result in additional unwanted costs in the future.
- The loan takes time to be approved and disbursed. Do not assume money will come in immediately. Business owners have to plan their current cash flow accordingly to avoid inconvenience due to a misalignment in timing.
Business owners should start preparing the following documents listed below to speed up the application process:
- Latest Notice of Assessment and IC of ALL directors and shareholder
- All operating bank statements for the last 6 months
- Financial statements for the last 2 years
- Business Registration / ACRA
We (Beacon Financial Services) specialise in helping clients (Small Business Owners) build a financially sustainable and resilient Business so that they can concentrate on growing.
Author of the article originally posted on LinkedIn:
Lenny Lim, Executive Director, Beacon Financial Services