As banks scale back, small businesses turn to specialist lenders

Date: 01/07/2019
Author: Chris Ash
Company: ExWorks Capital

Banks are abandoning smaller companies in light of regulatory burdens and global economic uncertainty. Yet banking techniques such as trade finance are flourishing thanks to a new range of specialist lenders. Chris Ash, Managing Director for ExWorks Capital in the UK, explains.

Getting through a single day without being assailed by negative news on Brexit, trade wars or economic upheaval in a major economy is something of a triumph in itself these days. Yet, unfortunately for small businesses looking for financial support, the current climate of uncertainty is playing havoc with their need for certainty when it comes to working capital.

Banks are running scared, and coupled with the fact they are already buckling beneath restrictive regulations such as Basel III and AML/KYC stipulations, their appetite for lending is being depleted at an astonishing rate. All of which leaves smaller businesses struggling for the liquidity required to support their operations.

Indeed, as the Brexit deadline looms, UK businesses face a growing threat to their cash flows. A possible “no-deal” Brexit could see the UK not only crash out of the single market and customs union, but also place even greater strain on the short-term lending environment. And, even if the UK avoids constraints on capital flows, banks could well suspend lending until some sense of normality emerges, which could take months.

Certainly, over the medium term, businesses will continue to be buffeted by financial regulatory changes as well as the market uncertainty surrounding Brexit. And, with global trade wars and sanctions being enforced by the US, we can expect to see sensitivity to risk increase further.

What next for SMEs?

Of course SMEs have been struggling to access bank financing as far back as the 2008 global financial crisis, so the situation is not new – just becoming more acute. Already, we are seeing SMEs increasingly tempted by quick-fix cash flow solutions that can be inappropriate, expensive and – frankly – unnecessary.

Of those on offer, probably the best known is that hardy perennial factoring. By purchasing their invoices, factoring companies promise positive cash flow and fast access to liquidity to re-invest in their supply chains without having to wait for their customers’ repayments. Yet these offerings are inflexible, requiring businesses to meet strict criteria regarding the kinds of customers they factor. They also require companies to offer access to their entire customer base, reducing financial flexibility and restricting funding from other sources of finance. And then there is the inconvenient issue of liability for non-payment – with the supplier still held accountable should the original invoice go unpaid.

So is there a better way?

In a financing climate so mired in complexity, corporates need a more flexible, innovative, approach. Trade finance can offer this – especially flexible trade solutions that focus on supply chains, inventory and receivables.

Of course, banks can – and do – offer trade finance. Yet the strict capital requirements mean they rarely offer such solutions to anyone beyond their core multi-national client base. Other types of lender – including the aforementioned factorers – will also offer trade finance as an “add-on” service, but generally favour a “one size fits all” approach simply to prevent borrowers from seeking a more bespoke trade finance offering elsewhere.   

Enter the specialist trade financier. Smaller, nimbler, and free from the regulatory constraints handicapping banks, these lenders are able to take a more calculated risk on transactions, leaving them free to focus on tailoring a solution to a company’s specific needs. Helping clients finance their supply chains – even when their balance sheets are already fully leveraged – lenders such as ExWorks Capital offer flexible, inventive and time-efficient solutions to companies, often stepping in to bridge the gap between a full-on bank loan and the necessary liquidity needed to fulfil orders through short-term bridging finance.

What’s more, by employing LCs, standby LCs, revolving letters of credit on repeat type transactions and usance on the receivables side, the client is then in a position to extend more credit to their customer. And, by examining each individual supply chain in detail, specialist trade financiers are able to identify opportunities in the transaction chain that both banks and factorers may have ignored.

Certainly, such specialist finance solutions present an optimistic outlook for SMEs who cannot yet see a light at the end of the tunnel when it comes to reduced funding access. And, with economic uncertainty expected to continue, alternative sources of finance are set to become an integral part of smaller businesses’ financial landscapes.