Trade finance is seen as the most practical and cost-effective solution to help small-to-medium-sized companies (SMEs) avoid bankruptcy. The pandemic has negatively affected operations, sales and bottom line, and more importantly resulted in delays in collection of outstanding amounts from customers.
During March-May 2020, governments provided billions in financial support to prop up SMEs, while allowing borrowers to defer capital and interest repayments on bank loans. But in spite of the support measures, cash flows have not improved at the desired level. The crunch time will hit the SME cash-flows when banks start chasing borrowers for resumption of the capital and interest payments on the loans. The repayments should start the latest from January 2021.
With a good possibility that many of the “frozen” loans will become non-performing, banks will again be obliged to tighten lending conditions, a development that will most likely hurt SMEs, which have historically been the first to be cut off from bank funding due to the weakness of their collateral, weak financial strength and market position.
Higher risk, lower margins
Banks argue that stricter capital requirements imposed by the Central Banks, tougher know your customer (KYC) and anti-money laundering (AML) requirements, negative interest rates as well as higher transaction monitoring costs have increased costs and eaten into margins, making smaller transactions, which are usually conducted by the SMEs, unprofitable.
This may well explain why the share of SME funding requests rejected by the banks is on the rise and increasing. With no access to new funding, the majority of SMEs face bankruptcy.
Trade finance solution
By far the most effective funding solution for SMEs is to consider factoring or invoice discounting, whereby SMEs offer credit to their customers, but their liquidity is not negatively affected, since they can assign their credit invoices to alternative finance providers and secure immediate cash.
“SMEs can bypass the rigid bank requirements on pledging of security and mortgaging assets by shifting to fintechs that offer alternative funding solutions,” said Shavasb Bohdjalian, Director of Eurivex Trade Finance Limited (http://www.eurivexfinance.com//) which offers without collateral business finance through invoice discounting for both domestic and international trade.
“When an SME assigns its credit invoices – i.e. sells its invoices for immediate cash, it does not need to pledge personal guarantees or mortgage tangible assets. The assigned invoice is the only collateral required,” said Athos Kyranides, Consultant at Eurivex Trade Finance Limited in charge of trade finance operations.
Another key advantage of invoice discounting is that starts-ups are also eligible to apply when the quality of their debtors or trade receivable is good and without providing any personal guarantees secure immediate funding to finance their growth.
Such financing arrangements are also useful for businesses looking to reduce their risk as Eurivex Trade Finance combines financing with credit insurance through its arrangement with Euler Hermes whereby credit invoices issued to buyers are insured against default.
A business owner has thus multiple opportunities to move away from the banks and start utilizing new innovative services offered by fintechs. The time to stop complaining and taking action is now!