Terms for local loans may be pushing SMEs overseas

I was delighted to read that the number of borrowers in heavy debt has dropped (Far fewer borrowers in heavy debt; June 9).

But I wonder how so many people succeeded in settling their debts in just 12 months, given that the economy has not improved. Where did their funds come from?

I believe that most of these borrowers are owners of small and medium-sized enterprises (SMEs) who enrolled for a working capital loan offered by Spring Singapore.

This loan has a high default rate because most SMEs here are negative cash-flow businesses, which need to consume cash upfront for research, development, sales and to provide credit terms before they can start collecting their first dollar from customers.

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The loan is also structured as a monthly capital repayment mortgage-type loan. Like a housing loan, it requires the return of the loan, but without an asset.

But, unlike a housing loan, the SME owner does not have a ready source of income, as the money has to be earned from the business itself.

Hence, the business may not have sufficient funds to cover the loan tenure and repay the loan, and the guarantor risks being made a bankrupt.

To avoid this, many of these business owners may have used personal line of credit to borrow and make up the difference. The interest payments deplete the money available to generate an income to sustain the business.

I understand that some SME owners have been borrowing from overseas, where their overseas lenders source their funds from shadow banks. These are legal banks but which interpret the rules differently.

The borrowers are willing to risk their company equity to keep their SME alive and also to retain their staff in Singapore.

To what extent have local loans affected SMEs that they are prepared to trade their viable livelihood with helpful foreign loans?

Erwin Phua Siew Jen

A version of this article appeared in the print edition of The Straits Times on June 20, 2017, with the headline 'Terms for local loans may be pushing SMEs overseas'. Print Edition | Subscribe