In the wake of the pandemic, governments across the globe put in place loan guarantees for businesses in various guises in order to protect the future economic road to recovery. But whilst their efforts are commendable, the eligibility criteria and restrictions that they put in place meant that many alternative finance lenders were and still are unavailable to provide a suitable offering. This leaves thousands of businesses, big and small, at the mercy of banks.
The business funding landscape is changing by the day. If you’re a business trying to survive, revive or thrive – access to finance and cash flow are just two of the many financial and operational challenges you’ll need to navigate. Where the struggle starts is the daily variations of what lenders consider as “viable” or “desirable”. Ultimately the standards deemed viable would be good credit history, punctual repayments, free cash flow, gearing and prospects. But in the time of Covid-19, a closed economy and businesses’ desire to hold on cash reserves and preserve working capital this can prove challenging! Another factor that traditional lenders will take into consideration is the security or collateral a business can put up in order to mitigate risk whether in the form of charge over property or asset or a personal guarantee leaving the owner(s) personally liable for the loan. The higher the risk, the higher the loan cost and the higher the likelihood of rejection.
In the on-going or post-Covid-19 environment, the need to find alternative financing has become even more critical.
Survive, Revive and Plan to Thrive
Across Europe, around 25 million SMEs contributed approximately 4.4 trillion euros to the European economy in 2018, employing around 90 million people. The need for SMEs to bounce back after Covid-19 is therefore essential not just to local economies, but to European and world economies.
A lot of the discussion of recovery at the moment is how companies will need to operate supply chains with more geographic sources. Larger businesses are already set up to cope with expensive global supply chains, but we may see smaller businesses taking larger risks to compete to revive. Trading overseas often means longer credit terms and providing domestic prices. The trade-off will be between short-term profit maximisation and longer-term risk reduction.
With rumours of a possible relapse of the Covid-19 pandemic in autumn raises an increased need for the prudent SME to put in place financial contingency plans now and secure funding early. The cost of securing such immediate liquidity is negligible when considering that it can save a business without putting additional pressure on the owners.
Staying power and growth in invoice finance providers
Alternative invoice finance has generally been less affected by the pandemic than other types of lending, but smaller players have been restricted by liquidity restraints of growth and contraction of credit insurance in some sectors. But with the industry continuing to mature and grow it shows little sign of slowing down firmly finding its place in the financial market.
SME owners and managers are becoming increasingly aware, and more comfortable with this type of lending. As traditional lenders continue to struggle in certain markets, the flexible, less risk averse approach of alternative lending is becoming more and more important.
As always, the key is to think about what the additional working capital will enable you to do, how long you need it for, and how often you’ll need it. The alternative finance market in general gives borrowers a huge amount of variation to help them find the right product for them and their business. See our blog on what to look for in an invoice finance provider here.
A potential lifeline on an individual invoice basis
In contrast to banks, alternative funding providers such as Accelerated Payments have introduced flexible individual invoice finance for SMEs with simplified procedures.
The funding is provided against assignment of the credit invoices without the need to provide personal guarantees or mortgage tangible assets. The assigned invoice, on an individual basis, is the only collateral taken into consideration.
Companies only need to supply their latest audited financial statements and management accounts, as well as aged debtors report (or an individual debtor) for the initial evaluation after which a funding offer is made with clearly defined terms and conditions, including transparent and competitive pricing.
Some alternative finance providers also provide ongoing protection against loss through a customer defaulting sometimes known as “bad debt protection”. Accelerated Payments provides invoice protection as standard to reduce the risk of customer defaults through credit insurance.
The majority of SMEs have huge exposure to potential bankruptcies of their customers who have piled up debt prior to the Covid-19 pandemic and are now unable to pay their obligations or will potentially be seeking easier credit terms.
Whilst, there was an initial contraction of the market there is good news on the horizon for businesses who trade domestically or internationally and rely on trade credit insurance to protect them if a customer defaults on payment. Governments, including the UK, France and Germany, have temporarily stepped in to guarantee business-to-business transactions currently supported by trade credit insurance, which looks to remain in place until December 2020. The guarantee is designed to ensure that the majority of insurance cover is maintained across the market.
A future landscape for businesses
In ordinary circumstances, 78% of accounts payable departments admit to paying invoices late. This can cause major headaches for some businesses. With economic pressure and downturns in business, it’s likely these customers will have further difficulties paying on time. So, with this increased pressure, now is the time for businesses to explore alternative options to support their working capital. While 7 out of 10 businesses fear they won’t survive the pandemic, and a huge number of lenders who closed their doors to new clients, a stream of alternative funding sources held theirs open.
In fact, in the case of Accelerated Payments they invited more in. Approximately 50% of companies taking up Accelerated Payments’ service never used invoice finance before. The flexibility of financing individual invoices and the immediacy with which they can turn on cash when needed gives the freedom to get back to business and take advantage of emerging opportunities.