small is beautiful | Global finance magazine
Encouraged by government stimulus programs, banks are finding new ways to finance SMEs. Once the economy recovers, will the surge in interest ease?
Just as it brought changes in other areas of life, the Covid-19 pandemic has triggered and accelerated trends that are dramatically changing the way small and medium-sized enterprises (SMEs) in Europe and North America. North finance their operations. “What was thought to be impossible for 20 years happened in 10 days,” says Nanda Kumar, CEO of SunTec, a global pricing and billing company.
While forming the backbone of most national economies, SMEs have long relied on traditional loans obtained through archaic application procedures. Most small businesses still look to banks and credit unions for financing; but their applications are regularly rejected, often due to a bad credit rating. Owners often lack current business accounts and instead have to transact from their personal accounts. Bankers, meanwhile, lacked reliable tools to predict winners and losers among small businesses.
Many SMEs have seen their activities severely curtailed during the crisis, in particular by blockages. The sectors most affected, according to an OECD report last July, include “manufacturing transport, construction, wholesale and retail trade, air transport, accommodation and food services, real estate , professional and other personal services (eg hairdressing) ”.
Thanks in part to the pandemic response, these handicaps are being resolved or no longer seem so intimidating. Due to new government stimulus packages and a set of new technologies, banks are “stepping up their efforts for SMEs” and looking to “build a value proposition,” says Matt Cox, head of corporate banking, to businesses and SMEs in the United States for consultant EY. “This has big, longer term implications.”
Quick action in our crisis
When the economic crisis generated by the pandemic struck, most governments acted quickly. The fiscal response in G20 countries had an impact of 11.2% of GDP at the end of June, according to estimates cited in the OECD report. Several countries have strengthened loan guarantees. Germany, for example, doubled the volume of credit backed by public funds to 2.5 billion euros ($ 3 billion).
Many countries have earmarked funding specifically for SMEs. The $ 2 trillion US stimulus package included a $ 367 billion fund for small businesses with fewer than 500 employees. In January, the United States launched a second Paycheck Protection Program (P3) designed primarily to help businesses large and small keep employees on their payroll.
“Government support, especially in Germany, has been very beneficial for SMEs,” says Thomas Michael Hogg, consultant and author of the recently published book Profitable Growth Strategy. “Angela Merkel understands that SMEs are the backbone of the economy. “
Governments rely on banks to implement these initiatives. Often overwhelmed by the sheer volume of funds and requests, banks have set up platforms to streamline and improve the approval process: sometimes alone, sometimes in collaboration with fintechs. Amid closed storefronts and restrictions on physical movement, everything happens online.
Some banks have also taken unilateral action, offering moratoriums on loan repayments and other facilities with or without public guarantees, says Miriam Koreen, senior advisor on SMEs at the OECD Center for Entrepreneurship, SMEs , regions and cities. In Ireland, banks offered payment holidays and emergency capital; the Italian Banking Association adopted a lenient debt repayment plan; and major banks in Canada have offered six-month deferrals on loan repayments.
Implementation went more smoothly in some countries than in others. In Germany, two large local commercial banks, Volksbank and Sparkasse, have led the way, Hogg says. But in the United States, there have been several cases of SME loans given to larger and more publicized companies than expected, including the Los Angeles Lakers professional basketball team. (The Lakers returned the money following bad press.)
“The first window [of loans] went fast, but it wasn’t clear that small businesses were getting their fair share, ”says Mike Salfity, global head of product strategy and general manager of North American community markets at Finastra, a London-based fintech.
To solve the problem, the second PPP gave a brief head start to 5,000 lenders who are focusing on minority-owned businesses. Big players, such as Bank of America, JPMorgan Chase, Cross River Bank and Wells Fargo, were leaders in the first round and are again involved in the second.
“The banks are there to give money to their customers, but what is against it? Credit risk, ”explains Kumar. “Archaic” lending systems based on “traditional information” cannot do the job, he argues, especially in times of crisis. Instead, banks need to keep pace with up-to-date enterprise resource planning and risk mitigation. “Banks need more reliable cash flow forecasts,” says EY’s Cox; and to their credit, “the banks have mobilized”. Accelerating pre-pandemic initiatives, they have “changed to provide secure procedures for gambling, digital documents and electronic signatures”.
A more important role for Fintechs?
Some banks have developed new internal capabilities such as these, while others have partnered with fintechs. Finastra, which says it already works with 4,500 financial institutions, developed software to help small players make loans to SMEs during the crisis, says Salfity, including an electronic notary, electronic signature and other online tools. “The challenge, especially for smaller institutions, was that they didn’t have the right software and workflow tools to manage the volumes they were seeing,” notes Cox. Thanks to these advances, “banks were able to allocate money to SMEs,” he says, including working capital loans. To do more business with SMEs, banks are exploring the idea of offering additional services, such as accounting and cash management.
A key trend that appears to have slowed down during the Covid-19 crisis, however, is the diversification of financing options for SMEs, according to a November OECD report. In recent years, SMEs have gradually gained access to new forms of finance, including venture capital, online alternative finance, leasing and hire purchase, and factoring. The 2020 figures show a slowdown in these areas despite the potential for reducing the debt burden on small businesses.
“Governments should pay attention to this,” Koreen says. If government policy aims to avoid over-indebtedness of SMEs, she argues, it should promote the use of other instruments.
Despite all the support measures, Koreen predicts an upheaval – a “reallocation” – among SMEs. But most analysts believe they will continue to stimulate national economies.
“SMEs are and will remain the powerhouse of the economy,” says Cox. “No doubt many will feel the pain, and many will close temporarily or forever. But I’m impressed with the ability of businesses to scale. For some, this could mean a move to different geographic markets or to online sales. It could mean a move to different geographic markets or to online sales. also include adaptations in their supply chains.
While it may seem counterintuitive, online travel agencies could help fuel the recovery, says James Allum, James Allum is vice president and head of Europe at Payoneer, a global payments company. Despite a drop in use after the pandemic, Airbnb and Booking.com, along with their various SME partners, could be ready for a comeback. “They’ve had a rough year,” Allum says, “but in the longer term people might be more inclined to take private vacations and not get on a cruise ship.” Some SMEs, whatever their sector, may wish to expand beyond their borders, where they can make “three years of progress in three months”.
Lenders will also have a role to play in the implementation of these post-pandemic strategies by SMEs. Their role could include a shift from liquidity to structural support, further digitization, insolvency support and increasing consumer demand by providing additional services, suggests the OECD, while recalling that a one size does not fit all. “Keep in mind that diversification is important for SMEs,” Koreen says. “Not all of them are well suited for bank loans or equity. “