Roberto Gutiérrez (CEO – Alvantia)
For the World Factoring Yearbook – BCR publication in association with FCI
It is not easy to talk about tools to generate liquidity for companies and economic crises when the world is going through the worst pandemic that most of us have ever known. This article is being written in early April in Madrid, Spain which is quite clearly one of the places most affected by this situation.
As I write from the relative calm in the eye of the storm which rages around me, I can’t help thinking about all those people who are suffering the most and who are fighting against these terrible circumstances, either by confronting the virus head on or by coming to terms with having lost someone close. Our thoughts are with all of them.
We find ourselves in a situation of economic semi-paralysis, where the vast majority of companies are closed, people are working remotely from their homes and the figures for unemployment, furloughs and temporary redundancy plans grow shockingly higher each day. It seems as if there were also an economic virus, a contagion which infects productive activity and is spreading like wildfire among businesses, shops and companies. I think that it would be appropriate to devote this article, essentially focused on the world of trade financing, to considering and reflecting on those products, services and tools that can most help small and medium-sized companies to move forward. It is necessary to understand that we are living in exceptional circumstances where what was once seen as normal or traditional, is perhaps no longer enough or even valid to deal with this crisis.
SMEs make up, in practically any country in the world, the great majority of the business fabric, providing activity, employment and wealth but they also provide stability and balance. Their survival is essential for any economy. SMEs are the economy’s heart and need to beat with a healthy and constant rhythm.
The sudden grinding halt in general activity will mainly have an impact on the weakest companies, those which live from hand to mouth, need to invoice a certain daily minimum and require the weekly collection of their invoices to meet their commitments to suppliers and employees. Many companies, I would guess the majority, carry out their business in this precarious way.
Some because they have only been running for a few years or because they have taken the risk of growing and have therefore sacrificed their returns to face new challenges. Others are in this position because they only focus on a few clients or because of the narrow confines of the market itself. There are the added difficulties of supplier and client negotiations and agreements, overheads, taxes, … all combining to make business survival dependent on how well each company can juggle the array of complex demands it faces on a daily basis.
SMEs must today, more than ever, be able to manage the concepts of working capital, cash flow and liquidity. Evidently, they have always done so, often by their own intuition and need rather than perhaps being aware of exactly how. Every day they continue with their activities without time to stop and think about how their own enterprise is actually generating the crucial air which allows them to continue breathing. Now, however, and for the next few months, if not years, ‘medicines’ and ‘ventilators’ will be needed to sustain the companies’ vital signs.
From the entrepreneur’s point of view, we are talking about carrying out a genuine exercise in cash flow forecasting, opening, maintaining or expanding financing lines that allow a breathing space to protect basic needs and can be fully leveraged in the good times that will come. This will involve negotiations with clients and suppliers where it is understood that we are not talking about margins but about survival and being able to carry on buying and supplying.
The important thing, the essential thing I would say, for the next few months, is to continue breathing by obtaining the greatest possible cash flow: cash collections, or even part payment in advance; financing which is matched to each credit claim as soon as possible; maintaining transparency and constant dialogue with our funders to promote trust and planning; avoiding long-term investment plans that may compromise the present; and paying attention to collection flows are some of the main undertakings that we may now need to prioritize over commercial and productive tasks.
The intervening parties
Meanwhile, in such an exceptional moment as the one presented to us, I think that three figures or participating parties are going to come to the fore and prove themselves to be more influential than ever in ensuring that a large majority of SMEs can get ahead. If in normal circumstances the dependence on third parties is very relevant, now and over the coming months and years it will be essential, even critical. Firstly, the State in any of its expressions or areas of responsibility; secondly, the Banks and any financial operators, which handle a large part of the “air that companies breathe”; and thirdly, the medium and large companies which manage a large part of purchases from SMEs and therefore the payment streams.
State support in the form of subsidies, guarantees, deferrals, tax reductions or any other form of aid will be essential for SMEs.
Banks and financial operators are going to play an essential role, as they do in any economic crisis. Understanding the relevance of the moment and the need to provide liquidity to companies will determine not only their survival, but may even affect the sustainability and future of many entities. This is not the time to maintain margins and pay out dividends. We are moving into a different era, a transition to a brand-new scenario that is unparalleled, has never been studied at any business school and has no point of comparison in previous crises.
Finally, we have the medium and large companies who handle a large part of the payments made to SMEs; those that control and establish the terms and conditions, provide the systems and mechanisms to carry them out and usually impose payment terms. Purchasing managers and financial managers should change their way of thinking, they should change their habits and customs to identify ways and means of supporting their suppliers and transmitting unequivocal support to their supply chain. It is not only about helping in the feasibility of supplying SMEs, it is about ensuring the future itself and reducing impacts on the company’s own production process.
The brutal immediacy of the consequences of a drastic economic semi-closure, the tremendous impact of internal and external trade interdependence, the speed at which news travels and the “foresight” parties try to apply to ensure that they can move to limit damage, all require responses, behaviors and new actions which are different from any others that may have been applied in previous crises, including the measures and guidelines taken during the painful market and credit crunch that began ten years ago.
Possible solutions in the field of payments
Focusing on commercial financing for SMEs, I believe that it is time to drive those existing solutions that can best facilitate working capital to SMEs and it is also the moment to be bold and dare to develop and implement new ones in the same way.
The coming months will undoubtedly be essential, strategically speaking, for entities and operators in the world of financing, conditioning their positioning, their supply and the results of the coming years on the decisions that can be taken now. Where some may only see threats and justifications for certain developments due to the circumstances. It is time to take on new challenges and identify opportunities.
If we talk about solutions which already exist and have been implemented in many geographies, I think we can agree that Supply Chain Finance (SCF) is surely one of the most interesting levers to support SMEs in times of difficulty.
The Spanish case serves as a reference to illustrate the power, capability and meaning of this product in economic downturns. Confirming, the name for SCF in the Spanish market, certainly played a very important role during the last economic slump, establishing itself as a highly efficient and suitable system to facilitate financing for SMEs.
SCF is not only a payment system based on confirmed orders sent by medium and large companies to banks so that they can offer financing to suppliers or, failing that, pay at maturity. SCF is a way of understanding, ‘how I would like to engage with my suppliers in everything related to the payment terms of a trade transaction.’ Thinking of SCF in this way we can see that:
– It enables a line of financing for all suppliers without discrimination
– It does not damage supplier’s creditworthiness
– It does not require the supplier to be a customer of the paying entity to be financed
– If the supplier requests financing, the supplier immediately receives the funds, eliminating risks of non-payment from its balance sheet
– It works under extremely simple and agile operating systems (App, Web, Contact Center, Office)
– It does not request or require minimum volumes or future vendor compensation
– The payer reduces confirmation times between its invoice and issuing of payment order
– The payer simplifies and efficiently manages its payment processes, eliminates documents and reconciliations
All these product features have led to more and more customers / issuing companies using SCF and incorporating it as a “natural” payment system. It will therefore come as no surprise that a volume equivalent to 13% of GDP was paid in Spain in 2019 and a third of all trade financing was carried out through this system (according to public data from the Spanish Factoring Association). This shows how incredibly important SCF has become in the Spanish market.
We can also highlight the fact that the advance rate, or the ratio which is obtained from dividing the amounts advanced to suppliers into the total orders managed in the system, went from 35% to 54% between 2007 and 2014 in Spain. That coincided with the last downturn period and these figures illustrate the value and interest of this system in the market, especially for SMEs with difficulties in obtaining liquidity through other channels. If we consider these figures come from the previous economic depression, we can only imagine what might happen now…
Financial institutions are also beginning to face this huge crisis and will continue to do so in the coming years. For some of those who are prepared, this will be the best time to continue improving, stand out and take advantage of opportunities. For other entities, this is certainly the time to undertake a profound transformation process so that they can successfully deal with the challenges of this crisis and survive.
This is, in my opinion, the best time for financial institutions to invest, and move forward with projects based on syndication of risk, refinancing structures or payment terms extensions. It’s the moment to set up new initiatives to better take advantage of the intelligence applied to data management or develop new control concepts for early detection and monitoring of defaults.
Many of you who are reading this article know full well what the development and implementation of a new SCF system or a new Factoring application meant in the past; hours of design, configuration of requirements and functionalities, platform construction and development as well as adaptation and integration with each entity’s or operator’s structural systems. Projects that were forecast to last a few months usually dragged on and took a year to complete or even longer.
Everything becomes much easier and more effective if we put ourselves in the hands of a specialist company which speaks our language, has the expert know-how and skills to have a full understanding of the business of trade financing and has technological platforms designed for quick and easy integration. Platforms that are functionally complete based on the latest technologies, made by teams with a long and proven track record and are backed by verifiable references.
In current times, it may well be convenient to take a step back from the path we are on and consider whether it is the right one. At the very least a strategic reflection on the paths we want to forge and the solutions we wish to provide to our clients and the market, is essential. As Ralph Waldo Emerson once said, “Do not go where the path may lead, go instead where there is no path and leave a trail.”