Local high-growth enterprises will have a new financing option to support their expansion plans through SPRING Singapore’s pilot Venture Debt Programme (VDP). Under the programme, DBS Bank (DBS), OCBC Bank (OCBC) and United Overseas Bank (UOB) will catalyse about 100 venture debt loans, totalling close to $500 million over two years. SPRING will provide 50% risk-sharing to these financial institutions for such loans. SMEs can apply for venture debt loans of up to $5 million each for working capital, assets, projects or mergers and acquisitions for the purpose of business expansion.
Announced at Budget 2015, the VDP complements current government loan financing schemes. Studies have showed that local enterprises in certain high-growth sectors face challenges in obtaining financing to support their growth. This includes innovative start-ups that typically have high financing needs, and growth enterprises in nascent sectors such as advanced manufacturing, clean technology or biomedical.
Venture debt is a form of alternative financing for enterprises with high growth potential but may not have established revenue streams or lack significant assets to use as collaterals. To compensate for the higher risk involved in backing such companies, venture debt providers may combine their loans with warrants, or rights to purchase equity. Venture debt may involve deferred payment terms to minimise short-term impact on cash flow. Venture debt has less shareholder’s dilution than equity investment.
“As we compete increasingly on knowhow and technology, venture debt supports the growth of companies which are asset light but IP (intellectual property) heavy. It addresses the gap between traditional bank loans and equity investments for such enterprises,” said Ms Chew Mok Lee, Assistant Chief Executive of SPRING Singapore.
Dr Mark Hon, Chairman of Action Community for Entrepreneurship, said, “The pilot venture debt programme is a catalyst for supplemental financing in the Singapore start-up ecosystem; particularly for high-growth start-ups that have raised capital from venture capitalists, or lack the assets for traditional loans. When utilised correctly, such a scheme could allow start-ups to enjoy enhanced capital efficiency through reduced dilution and accelerated growth at a lower cost to the business.”
The VDP was rolled out by DBS, OCBC and UOB in January 2016. These partners will extend venture debt to eligible enterprises within and beyond their current SME network and client base.
Having established its Venture Debt Financing programme in February 2015, DBS aims to back high-growth consumer and enterprise technology start-ups in the mobile, internet and cloud segments addressing a sizable local and regional market opportunity and invested by reputable venture capitalists.
UOB started to offer venture debt in October 2014. Its Venture Debt programme targets top Asian start-ups in Singapore, China, India and Southeast Asia from high-growth technology sectors. Under the VDP, UOB will extend Government-backed venture debt loans to local companies that meet the programme requirements. UOB will also be administering venture debt loans to high-growth, innovative start-ups through its associate company, InnoVen Capital Singapore Pte. Ltd.
Through the VDP, OCBC plans to offer venture debt to high growth SMEs across different industries, with or without venture capitalists’ investments. These enterprises should demonstrate strong business proposition (through planned introduction of innovative products, deployment of unique business models, for example) and have potential for growth in international markets.
In addition to growth potential, SMEs also must be registered and operating in Singapore, have a minimum of 30% local shareholding, and a group annual sales turnover of not more than S$100 million or group employment size of not more than 200 employees.