The owners of Small-and Medium-sized Enterprises (SMEs) are putting themselves and their families at a major risk when they agree to demands by the banks to provide personal guarantees for a business facility, but a practical and easier solution is available for use by SMEs.
“SMEs can bypass the rigid bank requirements on pledging of security and mortgaging assets by shifting to fintechs that can 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.
Read the small print
The majority of business owners do not read the small print in the bank loan agreements and are unaware that their personal assets such as their home and life savings could be at risk if they sign a personal guarantee to secure finance for their business.
With banks tightening lending criteria, business owners are required to sign a personal guarantee as condition of a finance deal in addition to mortgaging their family assets as additional collateral.
The problem with many SMEs is that the vast majority are not properly capitalized. Once the business idea starts generating sales, and the business starts to grow, the only way to secure working capital is to ask the bank for a loan.
The stock market as a means of raising capital is not an option, at least in countries such as Cyprus or Greece which lack liquidity, leaving SMEs at the mercy of the banks.
The Covid pandemic shows that unforeseen risk can emerge from any source and at any time, which is why a business owner should take precautionary measures and reduce risk as much as possible.
By far the most effective funding solution for SMEs is to consider factoring or invoice discounting, whereby they offer credit to their customers, but their liquidity is not negatively affected, since they can assign their credit invoices to the alternative finance provider and secure immediate cash.
“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 (http://www.eurivexfinance.com/) 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 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. It is time to stop complaining and act now!