Top 5 Challenges Faced By SMEs in Singapore

Business Tips

min read

Small and Medium Enterprises (SMEs) are the backbone of Singapore's economy, contributing nearly half of its gross domestic product and employing about 70% of the total workforce. As we navigate through 2024, these enterprises face a myriad of challenges that could impact their growth and sustainability.

Understanding these challenges is crucial for SMEs to develop adaptive strategies and leverage opportunities for resilience and expansion.

Challenge 1: Rising Inflation Costs

Inflation remains a pressing concern for SMEs in Singapore. While the annual inflation rate of 2.4%¹in June 2024 has eased from 3.1% in May 2024 — the lowest level since September 2021 — ongoing pressures on operational costs for SMEs persist.

The Monetary Authority of Singapore (MAS) has forecasted that inflation may stabilise around 2.8% by the end of 2024. However, the persistent rise in general price levels continues to increase operational expenses for SMEs, affecting their profitability and competitiveness.

According to a recent survey, nearly 62% of SMEs² reported that increasing operating costs are a top concern, highlighting the urgent need for effective cost management strategies to sustain their businesses amidst these economic pressures.

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Higher Raw Material Costs Affecting Profit Margins

The surge in raw material costs has been driven by global supply chain disruptions and geopolitical tensions, particularly in sectors like construction and manufacturing.

For example, the price of steel and cement has seen significant increases, with some reports indicating that construction material costs rose by 15% over the past year. This escalation directly impacts profit margins, forcing SMEs to either absorb the costs or pass them on to consumers, which can be detrimental to their market position.

Challenge 2: Manpower Shortages and Talent Acquisition

The labour market in Singapore is increasingly competitive, with the unemployment rate hovering around 2% as of mid-2024. This low unemployment rate indicates a tightening labour market, making it challenging for SMEs to find skilled workers.

The Ministry of Manpower has reported that job vacancies in the services sector have reached 60,000³, yet many SMEs struggle to fill these positions due to high salary expectations and limited talent pools.

Difficulties in Attracting and Retaining Skilled Workers

Attracting and retaining skilled workers is a significant challenge for SMEs, particularly as larger corporations can offer more attractive compensation packages.

According to a recent survey⁴, 70% of SMEs reported difficulties in retaining talent, with many employees seeking opportunities that provide better salary and career advancement prospects. This talent shortage hampers innovation and growth, as SMEs often rely on a smaller workforce to drive their operations.

Impact of Foreign Worker Quota Restrictions on SMEs

The government's foreign worker quota restrictions have further strained SMEs, particularly in labour-intensive industries. These restrictions limit the availability of affordable labour, forcing SMEs to rethink their workforce strategies and invest more in automation and training.

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Challenge 3: Digital Transformation Pressures

Digital transformation is no longer optional; it is essential for survival. SMEs must adopt new technologies to stay competitive, but the process can be daunting and resource-intensive. The Infocomm Media Development Authority (IMDA) emphasises the importance of digitalisation for business growth, yet many SMEs struggle with the associated costs and complexities.

Costs and Complexities Associated with Digitalisation

The complexity of integrating new technologies into existing systems poses a significant barrier for many SMEs. A survey indicated that 60% of SMEs lack the in-house expertise to navigate digital transformation effectively, leading to reliance on external consultants, which further increases costs.

Cybersecurity Concerns for SMEs

As SMEs embrace digitalisation, cybersecurity has emerged as a critical concern. The rise in cyber threats leaves SMEs vulnerable to attacks and necessitates robust security measures, which can be costly and require continuous updates and monitoring.

A study found that 40% of SMEs experienced a cyber incident between 2020 to 2021⁵, leading to financial losses averaging USD 500,000 or more. The costs associated with implementing robust cybersecurity measures can be daunting, with many SMEs struggling to allocate sufficient budgets for ongoing security training and system updates.

Challenge 4: Access to Financing

Tightening Credit Conditions in the Face of Economic Uncertainties

Economic uncertainties have led to tighter credit conditions, making it harder for SMEs to secure loans or investments. This tightening is particularly challenging for early-stage businesses that lack a strong financial track record.

Challenges in Securing Loans or Investments for Growth

Securing financing for growth remains a significant hurdle for many SMEs. Higher interest rates, which have risen by 1% over the past year, coupled with stringent lending criteria, mean that many SMEs find it difficult to obtain the necessary funds to expand their operations or invest in new technologies.

Challenge 5: Impact of High Rental Costs

High rental costs can significantly erode profit margins, making it difficult for SMEs to sustain operations, particularly for service-oriented businesses that rely heavily on foot traffic and visibility.

The Urban Redevelopment Authority (URA) reported that retail rents increased by 0.4% annually at the start of 2024⁶. This rise in rental costs puts additional financial pressure on SMEs, particularly those in prime locations, where rents can account for 20% or more of total operating expenses.

Finding affordable business spaces is becoming increasingly challenging for SMEs. Commercial property prices in Singapore have risen sharply, driven by high demand and limited supply, forcing many SMEs to compromise on their operational efficiency or customer reach to manage costs.

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Can SMEs Still Grow and Go International?

Despite these challenges, SMEs based in Singapore have consistently demonstrated resilience and adaptability. By leveraging available resources, embracing digital transformation, and adopting innovative strategies, SMEs can navigate these hurdles and seize opportunities for growth.

As SMEs look to expand internationally, the last thing they need is to deal with an added layer of complication in cross-border payment transactions. Rising operational costs and talent shortages already demand their full attention. This is where Wallex steps in, offering a multi-currency wallet that simplifies international transactions.

With Wallex's multi-currency wallet, SMEs can hold and manage up to 13 different currencies, including that of Singapore’s neighbouring countries such as IDR, MYR, and VND. This flexibility allows businesses Making payments from SGD to IDR to suppliers in Indonesia or receiving funds in MYR from Malaysian clients is made simple with Wallex.

For any SME navigating their international transactions, look to Wallex to cut your transaction costs and protect your profit margins against market fluctuations. Reach out to us now!