Lenders must embrace technology to help SMEs survive COVID-19

Kevin Day, Editorial Board Member of TRF News and CEO of HPD Lendscape, makes a comprehensive analysis of why lenders should embrace techology to be able to help SMEs survive. 

The COVID-19 virus has advanced across the world at an alarming rate, causing levels of disruption to the global economy not seen in a decade. Globalised supply chains for goods and services are under severe pressure, with few businesses escaping significant strain on their income. The head of the OECD has since stated that we could be facing the “gravest threat” to the global economy since the 2008 financial crash.

As a result, we are seeing governments and regulators around the world respond by implementing various measures to stimulate their economies, with the need to support SMEs during this time of crisis becoming paramount. However, government resources to support the many thousands of businesses facing uncertainty are finite and further support for SMEs during this crisis must be found elsewhere.

Banks, although traditionally reticent to lend to small businesses in the wake of the global financial crash, now have a major tool in their arsenal to support trade finance in the face of major economic uncertainty: technology. Increasingly sophisticated digital capabilities are making services such as factoring even more straightforward for banks and, in turn, more accessible to SMEs. If we are to help businesses survive this crisis, lenders must embrace such innovation.

SMEs face significant headwinds

In light of the rapid spread of Coronavirus, businesses around the globe face major financial uncertainty in the months to come. In the current climate, there is every chance we will see companies delaying invoice payments, meaning lenders are getting paid late and disrupting their own operations as a result. This may be because of company policy to protect cash flow during a difficult time, or there may be more simpler explanations, such as disruptions from workforces shifting away from offices and into homes, impacting productivity as a result.

Supply chains – already suffering from trade tensions between China and the US – are being further pressured, as restrictions on movement around the world result in less international trade and less sales. According to riskmethods, manufacturers globally are experiencing supply chain problems due to the outbreak of COVID-19, with a 44% increase from December to February in companies declaring “force majeure”. The bottom line of this is that without access to finance many businesses – large and small - risk not surviving the Coronavirus pandemic as a result of defaults and bankruptcies.

Challenges increase for SMEs seeking access to finance

The importance of accessing trade finance for these businesses at this time is therefore absolutely critical and governments around the world have stepped up to make dramatic pledges of support. In the UAE for example, the country’s central bank has moved to ensure banks can help SMEs gain greater access to funding by slashing the amount of capital banks have to hold for their loans to SMEs by 15 to 25 per cent, as well as limiting fees and minimum account balance. Lots of other countries are enacting similar measures - such as guaranteeing transactions - so that smaller enterprises which form the backbone of national economies can stay afloat.

But these resources are finite and there are question marks over how much cash reserves governments have given we do not know how much finance will be needed. Furthermore, there was - pre-coronavirus - a $1.5 trillion trade finance gap, with SMEs already finding it challenging to attract funding from banks and other major lenders. As such, there must be other options for business to weather this storm.

New technology can step in to help fill the finance gap

Factoring and other forms of SME finance, enhanced through increasingly sophisticated digital offerings, have presented themselves as an opportunity to lenders to support SMEs clients, increasing the speed, transparency and therefore profitability of these services.  Already significantly disrupting the SME lending space, the technological solutions will be pivotal in helping businesses worldwide access the finance they need to face a difficult economic period ahead.

The rise of these new tech solutions makes ABF and factoring accessible for even the smallest SMEs, providing support through supply chain financing, invoice discounting and so on. The increased speed of service allows companies to receive the funds they need quickly, based on sophisticated data analysis. Advanced tech capabilities actually help lenders to automate these processes, which means businesses can manage their facility and provide data via a single platform, making the process easier to manage.

Embracing innovation will now become necessary

Coronavirus has only been with us for a couple of months and already it has caused widespread - if only medium-term - changes to every facet of our daily lives. Long term however, it may have a profound impact on the way we work, travel and consume, which has major ramifications for business. Access to finance will be life or death for such companies.  As this happens, technology will become even more important than we thought previously. Cloud-based systems, enhanced security and online tools will enable lenders to address this need, more profitably offering services such as factoring to keep the backbones of our economies running beyond COVID-19.