Major economies in Southeast Asia have been heavily affected by the pandemic and are currently on the mend as economies are slowly opening back up and businesses resume operations. However, the pandemic has prompted a surge in pandemic-driven online shopping, causing millions of consumers to adapt to new spending habits and embrace eCommerce, permanently reshaping consumer behaviour. According to a Bain & Company and Facebook report, 8 out of 10 consumers in Southeast Asia are now digital. 

The pandemic-induced digitalisation of Southeast Asia’s economies, on the other hand, is occurring unevenly. Although consumers have made the transition to digitalisation with ease, many businesses, such as SMEs, have struggled; even though SMEs form a significant part of the economy of most SEA nations, accounting for between 89 and 99% of total establishments. According to IndSights Research’s quarterly Business Sentiments Survey, approximately 9 out of 10 enterprises in Singapore had their operations disrupted in some manner, and 3 out of every 5 SMEs reported a loss in revenue. 

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To make up for the revenue loss, many businesses will turn to banks and traditional financial institutions. However, many SMEs struggle to secure financial support or ease cash flow concerns from these traditional forms of financing.

The gradual decline of traditional financing

Traditional banks do not serve SMEs simply because they view SMEs as unprofitable. SMEs have fewer legal procedures and frameworks in place and usually operate in emerging industries. These SMEs rarely have collateral against which to borrow, leaving Southeast Asian SMEs and this leaves Southeast Asian SMEs faced with a substantial funding gap, stifling expansion while accounting for a large percentage of economic activity. 

Moreover, the pandemic proved that traditional financing in the post-pandemic era is no longer sustainable. During the pandemic, technology provided new opportunities for digital financial services to accelerate and improve financial inclusion for SMEs in the region. While digital financial services are still relatively limited in comparison to traditional financing services, they are growing rapidly and are expected to generate at least $38 billion in revenue across Southeast Asia by 2025.

Other challenges affecting SME growth

Other challenges remain, such as the humanitarian crisis in and around Ukraine, which has raised concerns about global stagflation. The International Monetary Fund (IMF) cautioned that with growth falling short of expectations and inflation rising, most countries’ monetary policies would need to be tightened. 

According to the Monetary Authority in Singapore’s highlights regarding the Recent Economic Developments in Singapore, prolonged positive inflation surprises could trigger a sudden tightening in global financial conditions. The danger of a disorderly market downturn has escalated in line with pre-existing vulnerabilities such as rising debt levels and stretched asset valuations.

If SMEs, which are the backbone of the Asian economy, find it more difficult to acquire finance, this might endanger the Southeast Asian economic development and employment, particularly in developing Asian countries.

A fresh approach to providing funding to SMEs 

A new generation of fintech lenders for SMEs has emerged in recent years, providing a new form of financing that is faster, simpler, more cost-effective, and more transparent. For the first time, SMEs may share what data they have in return for loans to help them expand, despite more than 70% of individuals being either “underbanked” or “unbanked”. Broadening SMEs’ access to financial services can help them get more capital while also encouraging economic growth and development.

Alternative revenue-based finance companies, such as Jenfi, are now better positioned to meet the funding needs of SMEs, guide them out of the impending financial crisis, and unlock their potential. Jenfi is a financial technology company that provides revenue-based financing to rapidly growing companies for businesses and startups in Southeast Asia. Jenfi aims to assist digitally-enabled businesses, such as e-commerce ventures and high growth startups, to accelerate their sales velocity by funding their marketing, inventory, and growth campaigns.

SMEs who choose this funding path often benefit from more flexible target repayment plans rather than fixed instalment repayment plans, and they pay a flat fee depending on the amount of financing they secured, their monthly sales, and the number of months it will take to repay the loan. The application procedure is entirely online, and companies have secured funding in as little as 24 hours in rare circumstances. This type of alternative funding is far better than traditional financing, which might take months.

Transforming financing for SMEs in Southeast Asia

While the pandemic has brought unprecedented challenges, it also fueled innovation and rapid change. Despite the advent of digital finance alternatives, SMEs continue to struggle to secure traditional financing, which is why government initiatives to support them have risen. Banks in Indonesia, for example, must allocate at least 20% of their total loans to micro, small and medium enterprises this year, with the proportion gradually increasing to 25% in 2023 and to 30% in 2024.

When it comes to banks and fintech companies, it’s clear that both are vital to driving innovation and economic growth. It goes without saying that one sector cannot and should not do it alone. In the hopes of greater regional economic stability and progress for the region, both sectors should strive to help SMEs bridge the financial gap and fuel their growth.

This article was contributed by Jeffrey Liu, co-founder and CEO of Jenfi

About the author

Jeffrey is one half of the dynamic duo who started Jenfi, a financial technology company that provides revenue-based financing to rapidly growing businesses in Asia. Jenfi aims to assist digitally-enabled businesses, such as e-Commerce ventures and high growth startups, to accelerate their sales velocity by funding their marketing, inventory, and growth campaigns.

Jeff brings a strong operational and financial background from GuavaPass where he served as the Co-founder & CEO. Prior to that, he helmed the role of Head of Corporate Development at BeachMint, a venture-backed social e-commerce company in Santa Monica (founded by the Co-founder of MySpace). During his time there, he ran the company’s Business Intelligence and Analytics divisions where he forefronted the merger between BeachMint and Lucky Magazine, a Conde Nast subsidiary, forming The Lucky Group.

Prior to this, he helped launch a hedge fund in Singapore; worked as an investment associate at credit and special opportunities hedge fund in Chicago; and as an investment banker at Lehman Brothers. Jeffrey graduated with an MBA from the University of Chicago Booth School of Business and received a BS in Industrial Engineering with an additional major in Economics at Northwestern University.