Small and medium enterprises (SMEs) form the backbone of growing economies. In Thailand, SMEs contribute to domestic growth and employ millions of workers. 

The Office for Small and Medium Enterprises Promotion (OSMEP) shares that in 2019, there are over 3.1 million registered Thai SMEs, 98.5% of which are small and micro-enterprises. In 2016, they accounted for 78.5% of total private sector employment and contributed 42.2% to the country’s GDP, according to OECD.

An important and recurring challenge for SME owners is the lack of access to capital and financing. In 2011, the credit gap was estimated at US$11.8 billion. That is the difference between Thai SMEs’ potential need for formal credit compared to what is provided to them. On average, a Thai SME needs US$126,000 of credit to sustain its operations. 

For SMEs to realise their full potential as a significant driving force of the economy, steps must be taken to understand the gaps in SME financing and to solve the existing disparity between the supply and demand for capital. 

Understanding the gaps in SME financing 

Generations of Thai SMEs have turned to self-financing to start and run their businesses. An ERIA Research Project found that proprietors of Thai SMEs use their personal funds and borrow from friends and relatives for capital. 

SMEs perceive several obstacles to their financial access. The complex and cumbersome processes in applying for loans can be intimidating for proprietors. And the Thai financial landscape is dominated by seasoned banks that practice collateral-based lending - and collateral is something that SMEs don't have naturally. This traditional transaction has been unfavorable to SMEs and challenging for banks to address because it looks like a conversation cannot be had if an SME is without collateral. 

The use of old financial statements of SMEs to assess credibility is also a hindrance for high growth SMEs. Evaluating which firms could be entitled to loans based on the earlier profitability or number of years in operation is sensible, but does not quite capture the whole experience and potential of SMEs. New digital crowdfunding platforms use surrogate data analytics to help these SMEs become “credit worthy” 

Helping SMEs in tough times

The Thai government demonstrates its commitment to support the growth of the SME sector in various ways—from changing policies to expand the issuance of SME loans to allocating resources for programs fostering innovation in businesses.  

Financial assistance is most crucial for SMEs to stay afloat during crises. Amid COVID-19 pandemic, the Thai government has rolled out several rounds of stimulus packages for businesses, including funding for commercial banks to lend to SMEs. The government will absorb the interest rates of these soft loans for the first six months, so SMEs can improve their liquidity during this payment holiday. 

Alternative financing for SMEs

Microfinance can be another route for SMEs. It’s a finance model that found the most success in developing countries, providing credit access to the unbanked and underserved. Microfinance institutions prove to be popular and indispensable whether they are for personal or business use. Formal microfinance institutions are under strict regulations, while semi-formal institutions like cooperatives or independent MFIs govern their own operations. 

One funding source that took off in both developed and developing markets is crowdfunding. Being funded by the crowd has allowed thousands of entrepreneurs to start their own businesses, test a new product or service, and build relationships with customers. It has great potential to be the future of SME funding in Thailand. 

Crowdfunding as the future of SME funding

SMEs do not have hard collateral to pledge to banks, and therefore must look at alternative sources of financing for their growth.

Aside from self-financing and soft loans, SMEs must diversify their sources of financial support.

Crowdfunding is an efficient and proven way for SMEs to raise capital. It is an evolved form of digital financing where anyone can call on financial support for their projects and businesses using a dedicated online platform.

The Thai crowdfunding landscape is poised for growth, despite the impact of COVID-19. The key challenges are in the treatment of debentures. Debentures were traditionally issued by larger companies and with crowdfunding SMEs can take advantage of debenture issuance also. However, SMEs will face challenges in meeting all the onerous requirements of debenture issuance and formalities surrounding wet signatures etc. which make the process difficult for small loans taken in volumes.

Thai financial institutions are able to recognize this opportunity. In early 2020, the Securities and Exchange Commission relaxed debenture crowdfunding regulations. This means that debenture issuers — the businesses raising funds — need not cancel their offering if they don’t reach 100% of their target project values. An issuer can raise up to 80% of its fund goals and can disclose information to investors for pushing through with the offering. 

This updated policy is a good indicator that the SEC is in touch with the realities of the current business environment. Embracing fintech innovation such as debt crowdfunding is a great step in the right direction to closing the gap in SME financing. There are also some regulations regarding Debenture issuance and Investor Escrow accounts which the SEC is taking note of. 

Left: Orathai Chanyaphaiboonlap, Head of Business Development
Right: Archava Thaluang - Senior manager, Sales and Product Integration

Validus, an alternative financing platform headquartered in Singapore, is among those who seek to empower SMEs in Southeast Asia through innovative technologies. Founded in 2015, Validus brings together accredited individual and institutional lenders and SMEs in a platform powered by AI and machine learning. Since then, Validus has expanded into Indonesia (Batumbu) and Vietnam (Validus Vietnam), and has topped US$315 million in business funding—a record for P2P lending platforms in Singapore.

In May 2020, Validus has successfully raised over US$14 million, with US$20 million in committed capital in its ongoing Series B+ funding round co-led by Vertex Growth Fund (Vertex Growth) and Kuok Group's Orion Fund managed by K3 Venture Partners. With the fresh funding, Validus will continue to invest heavily in technology and innovation, and solidify its position in the three ASEAN countries it is present in. It will also fund the upcoming new venture in Thailand slated for Q4 2020. 

In Thailand, Validus will operate under Siam Validus Capital with a crowdfunding license, providing SMEs with an accessible and intelligent platform to access capital. SMEs can offer crowdfunding bonds for sale to investors through a platform that is regulated by the SEC. Investors can likewise search for these bonds on the same platform. The investor will receive the return on investment from the repayment of the bond issuer. Validus aims to disburse over $200 Million to Thai SMEs in the first 24 months and support the SMEs in time of need.

Inclusive and accessible financing can increase SMEs’ resilience as individual firms and as a sector. With various viable options to finance their businesses, Thai entrepreneurs and SME owners could be more confident in their growth and contribution to Thailand’s development.