With the Covid-19 pandemic ongoing and the UK under another National Lockdown, the past 10 months have been increasingly difficult for SME’s.
Ian Duffy is the CEO of Accelerated Payments provides finance to businesses with an immediate need for working capital to fund new opportunities for growth or continue operating while they wait to get paid. Here Ian shares his thoughts on the continued effects of the pandemic has on SMEs.
Another lockdown, another blow for businesses.
The past year has been particularly tough for so many entrepreneurs and SME owners. The true impact of Covid-19 will reveal itself with the impending finale of government support schemes – furlough, business interruption loans and the tax breaks. Only then, when the SME funding market is largely returned to the private sector, will we truly be able to understand the effect that the pandemic has had.
Access to finance, a record still playing…
The fact remains that access to finance is, and will continue to be, a big problem for all business owners. High street banks and traditional finance providers have historically been unable to address the myriad of issues that entrepreneurs face at all growth phases – whether start-up, scale-up or simply just trying to survive. Typically, SMEs are considered simply too small or too complex for major financial providers to understand and take a gamble on – exacerbating a long-term trend of limited access to finance.
Before the pandemic, around 50% of SME lending was provided outside of high street banks with smaller firms continuing to struggle to access loans at an affordable or appropriate cost. Around 20% of the remaining alternative funding was provided by fintech platforms entering the market – leveraging their freedom from the legacy issues in technology and credit decisioning of the past.
As the pandemic continues to play out around the globe, businesses are faced with the added complexities of buoyant lockdown restrictions and social distance measures which are now legal requirements for employees and customers alike. Cashflow has been restricted, money spent on additional well-being support, tech investment. The delayed tax deadlines and interest/fee holidays may have been a welcome break last summer but those businesses who took advantage of this are now faced with commencing repayments in the next few months.
There is much speculation of the finance and credit insurance sector ongoing response to the pandemic, and we have already seen a reduction in credit from banks and exposure limited in the credit insurance sector. But SMEs and entrepreneurs will continue to need a lifeline to get through the next 12 months and there is an unwritten responsibility of lenders to support their clients. The Fintech community has positioned itself well to address this issue head-on, including SME focused challenger banks, peer-to-peer lenders and working capital financers.
But, just like any other business, some fintech providers have also struggled during the pandemic. While some SME funders are under pressure due to loan impairment and a credit squeeze on funding lines, others have evolved the way they operate to continue their support for businesses.
So Q2 2021, then what?
Q2 2021 will see business cashflow hit from a multitude of angles. With the furlough scheme due to end on the 31st March, owners will have to prepare their teams for a longer-term outlook and ultimately make some tough decisions on their workforce. For those businesses who use consultants or contractors, IR35 comes into force on the 6th April in the private sector. VAT payments through the Time To Pay HMRC scheme deferred from 20th March 2020 and 30th June 2020 as a result of the coronavirus pandemic are also due by 5th April 2021.
We then come to the exhaustion of CBILS scheme signifying the start of repayments due. By 30th April 2020, £4.43bn had been approved in CBILs loans supporting 27,322 businesses.
Whilst those who are applying for CBILs now benefit from the interest rate cap of 14.99 per cent, all those who took advantage of early applications are not so lucky. It is said that a small proportion of borrowers who took out loans after CBILS launched in March 2020 – but before the interest rate cap was introduced in June – are paying substantially more interest than would now be allowed. One loan has been taken out at 34.9 per cent, the highest individual interest rate for a loan under the scheme.
Another CBILS criteria imposed by the government was the absence of a personal guarantee on loans up to £250k. For those above the £250k threshold demanded personal guarantees from directors of up to 100% of a loan, meaning directors are exposed to serious personal financial risk should their business be unable to meet the repayments at some point. They can be pursued through the courts for repayment, putting at risk their home and other assets. Furthermore, there are instances where a director can be held personally liable for repayment of their company’s debt even if they have not provided a personal guarantee.
So how can fintech help?
Fintech firms have been notoriously competitive as evidenced by marketing and PR budgets, but Covid-19 saw the rise in a more developed collaborative approach between FinTech’s. Not just from the point of view of banks partnering with FinTech SAAS products but a solidarity rising between lenders. Benchmarking their own products against others in the market and referring deals where the SME did not quite fit their model or credit risk appetite.
Partnerships sprung up between CBILS accredited funders and investors, and whilst the scheme comes to an end, liquidity in the market continues to be there for those lenders that have suitable working capital products.
One suitable product for the cash deficient SME that has been around for centuries is invoice financing or factoring. This product has gained popularity as a working capital tool during the pandemic, providing millions of SMEs with access to cash flow to survive, revive and scale. It will continue to flourish in recovering markets. With the shift in emphasis on the credit quality of the SME’s clients rather than the SMEs themselves, invoice finance allows businesses with a less than ideal balance sheet strength or consistency trading history to leverage their unpaid invoices as an asset. Perhaps some company directors may look to add this into their working capital toolbox to support stressed cash flow through this time.
Technology enables this to be done in a process that is transparent, reliable, straightforward, and quick. A facility can be set up and paid out within the week. Wrap this with credit insurance, fintech invoice finance providers can provide a service that protects SMEs against late payment, risk of non-payment and all without the requirement for more debt or personal guarantees.
So, while governments globally withdraw financial support, and SMEs demand more funding, the time bomb continues to tick. But, with a collaborative effort from FinTech’s and their funders alike, the time frame can be extended to help defuse difficult situations for SMEs who look to access additional working capital to survive.