Asset Based Finance can help under pressure SMEs in Europe

EU economic growth is stalling. The IMF has already halved its 2019 growth forecast to 1.2% compared to last year.[1] Such sluggish growth is likely to have a very negative impact on the region’s SMEs not just because sales and revenue growth will falter, but because payment cycles are likely to lengthen putting an additional squeeze on SMEs, which play such a strong role in European economies. Given this backdrop, one of the core factors that could help them to cope with this gathering storm is improved access to finance. SMEs have already suffered as a result of banks restraining their lending to small businesses post the Great Financial Crash. However alternative finance options have emerged, such as the private credit and debt sectors and within this arena it’s the factoring and broad asset-based finance (ABF) market, given its track record, recent growth and the scale of the funds it can provide, which likely offers SMEs the best prospect of staying buoyant and helping the region through more challenging economic times.

 

Economic storm clouds are gathering

The IMF’s downbeat forecast is reflected in individual national economic performances. Recession is an acute risk in Germany, stagnation grips Italy and question marks hang over France, given the size of President Macron’s financial stimulus – he has injected some Euro25bn into the economy, equal to 1% of GDP, since he took office.[2] While the CEE countries have performed better, concerns are growing here too. For instance, regional CEE leader Poland’s economic growth has been, at least, partly due to external factors, such as influx of inexpensive Ukrainian labour and benefiting from the cyclical upswing in the EU that peaked some two years ago.  

 

SMEs are critical to Europe’s economic growth

To help cope with the likely more restrained growth picture going forward, the region’s 20 million SMEs are vital. According to the EU’s ESPON[3], they account for around 99% of all businesses, contribute 67% of total employment and generate nearly 60% of the value added.  The French SME sector alone, which has a productivity rate higher than the EU average, contributes 9 million jobs[4] and Germany 18.3 million.[5]  In Italy they create nearly 67% of value added for the country’s economy, according to data from the European Commission.[6] The pattern is similar in CEE. For example in Poland, according to research by Polityka Insight, SMEs generate 36% of national revenue[7].

 

But access to finance still difficult

Despite their key role in European economics, with regard to employment, productivity and overall output, SMEs across the EU are still finding access to finance challenging. A recent report by German platform-based lender creditshelf, which focuses on SMEs, found that banks are more and more reluctant to lend to small businesses. Indeed, only half of SMEs in Germany have access to such traditional finance.[8]

 

Bank loans represent about 70% of corporate financing in France and according to Marie-Anne Barbat-Layani,[9] CEO of Fédération Bancaire Française and with the growing regulatory pressure to monitor risk and solvency and the advent of Basel III, she and other experts fear that credit supply to French SMEs will be constrained. In Italy banks’ overall loan supply has actually contracted, data from Euler Hermes show, and the poor state of banks’ non-performing loans (NPLs) does not help banks’ ability to boost lending.[10] In the CEE region, with the banking systems less mature, there are similar difficulties. In Poland, for example,  there has been a significant reduction in corporate credit growth as well as in the rate of investment lending growth and the number of companies that have been tapping the commercial debt markets has declined too.[11]

 

An array of alternative financing options have emerged

To address this issue of accessibility to finance, a number of alternative sources of funding have emerged. Private credit is one of these alternatives, where non-bank lenders, such as pension funds and other investment institutions commit capital to private credit funds to lend to businesses. Indeed, the Alternative Credit Council, the industry’s global representative body, estimates that there could be over $1tn of assets under management internationally by 2020[12]. The sector has made inroads among European SMEs as this form of lending can be more bespoke, offers more flexibility than bank finance and provides competitive lending terms.

 

However, the private credit sector faces some significant issues. For example, the regulatory picture is not straightforward. In France, for instance, the regulatory requirements to set up as a private credit manager are prohibitively difficult.[13] And in Germany, there is some uncertainty created for managers by the German Banking Act. Indeed, the Alternative Credit Council has recommended that this be amended. In Italy too there are a number of barriers. Non-EU Alternative Investment Funds (AIFs) are restricted from lending into Italy under national law. Complicating the outlook is the fact that the weaker outlook, both economically and for the capital markets, is making investors concerned about the prospects for businesses too and holding back their commitments.

 

Another option for SME is private debt funds. Global funds raised to invest in private debt have been accelerating. In 2017 they increased by 10% to more than $100 billion (£80bn), and this pace of growth has largely continued with the focus on Europe (up 26%) and in Asia.[14] Last year BNP Paribas Asset Management expanded its private debt range with the launch of a UK SME Debt fund, offering investors access to the lending market for small and medium UK businesses[15]. However, for SMEs debt funds can be expensive with regard to the fees and interest rates they charge and typically they focus is on medium-sized and larger companies so earlier-stage business would likely struggle to secure funding from such funds.

 

Asset based finance including factoring likely offers the best solution

Probably the option that offers most promise is ABF, in particular areas such as factoring, which help support SMEs cash flow better in downturns. Today, the industry is a sophisticated transactional business funding model, which has probably never been more widely adopted across continents. Figures from last year show the total global volume of ABF and invoice factoring at US$3 trillion, an increase of 5 per cent on 2017.[2]  What is attracting SMEs to this form of lending is because ABF can offer more affordability, flexibility, fewer covenants and simple access to working capital.

 

The ABF industry in Europe has been growing strongly in recent years. For example, France has the second highest volume of ABF/factoring, which has been growing by 10% per year for the last seven years.[16] In Germany, it is firmly established and has been growing at an average of 5% over the last eight years.[17] With an established presence in both France, with clients such as ABN AMRO Commercial Finance, Bibby Factors France and Société Générale Factoring France, and in Germany, with clients including ABN AMRO Commercial Finance, Société Générale Factoring Germany, Siemens Financial Services, HPD LendScape has seen the benefits that this alternative finance can provide for SMEs first hand. In CEE, for areas such as factoring, Poland has emerged as the largest market in Eastern Europe, increasing by 12% in 2018 alone. [18]

 

ABF is also being offered across the business spectrum. In Europe, according to research consultancy Round Window, some 62 per cent of ABF advances go to large companies, with 22 per cent to medium-sized businesses and 17 per cent to small businesses.

 

The rise of new tech solutions makes ABF and factoring accessible for even the smallest SMEs as increased speed of service allows companies to receive the funds they need quickly, based on sophisticated data analysis. Advanced tech solutions such as the HPD LendScape platform actually help automate these processes. They mean businesses can manage their facility and provide data via a single platform, making the process easier to manage. While the prospect of an economic downturn may be daunting and banks unwillingness to lend not helpful, with the array of alternative finance options now available to SMEs they should be able to weather the looming storm and help lead Europe to eventual recovery.

 

 

 

[1] https://www.imf.org/en/Publications/REO/EU/Issues/2019/10/24/REO-EUR-1119, p11

[2] https://www.ft.com/content/c8e14026-d001-11e9-b018-ca4456540ea6

[3] https://www.espon.eu/sme

[4] European Commission – 2018 SBA Fact Sheet – France - https://ec.europa.eu/docsroom/documents/32581/attachments/11/translations/en/renditions/native

[5] European Commission, 2018 SBA Fact sheet - Germany

[6] European Commissions, 2018 SBA Fact Sheet - Italy

[7] https://www.politykainsight.pl/multimedia/_resource/res/20105186

 

[8] https://www.crowdfundinsider.com/2019/11/154089-germany-smes-are-finding-it-harder-to-receive-bank-financing-reports-creditshelf/

[9] https://www.ipe.com/pensions/pensions-in/france-sme-cash-lifeline-gains-investors-attention/10001685.fullarticle

[10] https://www.eulerhermes.com/en_global/economic-research/insights/European-SMEs-Filling-the-bank-financing-gap.html

 

[11] https://www.researchgate.net/publication/330324521_THE_SOURCES_OF_FINANCING_FOR_SMES_IN_POLAND

 

[12] https://www.aima.org/article/acc-publishes-financing-the-economy-2018.html

[13] https://www.aima.org/educate/aima-research/non-bank-lending-in-the-european-union.html

 

[14] https://withcadence.io/blog/an-emerging-alternative-investment/

[15] https://www.bankingtech.com/2018/07/bnp-paribas-launches-fund-for-sme-lending/

[2] https://fci.nl/en/news/PRESS%20RELEASE-%202018%20Preliminary%20Global%20Factoring%20Statistics/5459

[16] https://fci.nl/downloads/Annual%20Review%202019.pdf – FCI report 2019

[17] https://fci.nl/downloads/Annual%20Review%202019.pdf – FCI report 2019

[18] https://www.hpdlendscape.com/resources/news/central-and-eastern-europe-a-fast-growing-factoring-market/

 

Written by: Edwige Lemercier 

First published on: Finance Monthly