By Ian Duffy
The front-page headlines of news media business sections tell of big companies going under — and since the beginning of the COVID-19 pandemic the list of casualties keeps getting longer — with bankruptcies up 50 percent since last year. Household names such as Le Château, Geox, Cirque du Soleil and Aldo footwear are just some of the major firms that have declared insolvency in 2020: and there will be more in the new year.
This roll call of insolvency should give pause for concern. Not simply because larger public companies are having trouble and are integral to our economic growth, but because they remain the largest credit provider to the small and mid-sized businesses (SMBs).
SMBs bear impact brunt
As the global pandemic continues to affect SMBs across Canada and the globe, it is become increasingly important to find funding solutions that keep these engines of our country’s economy running.
SMBs have been caught in a credit crunch as a result of the pandemic that is exacerbated by two factors namely reduced capacity from banks as they seek to shore up existing exposure to the SMB sector as well as a tightening of credit both from challenger banks and the FinTech community. According to Biz2Credit, big banks only granted 13.6 percent of SMB business loan applications in August 2020, compared to over 28.2 percent in December 2019. Small bank lending has dropped even more dramatically, from over 50.6 per in December 2019 to 18.5 percent in August 2020.
In a recent report, Statistics Canada shows that small businesses have been impacted the most by the pandemic because many are unable to take on more debt and are more likely to experience a decrease in revenue.
Nearly one-quarter of businesses with 19 or fewer employees reported revenues being down by 40 percent in August 2020 compared to the previous year. And roughly 6 percent of businesses with one to four employees said they were actively considering bankruptcy or were closing because of COVID-19.
It would have been much worse except for government intervention. Almost 9 million people have accessed the Canadian Economic Recovery Benefit (CERB) package, paying out CAD81billion in relief so far and supporting both the unemployed as well as those that are struggling as self-employed and gig workers.
While Canadian businesses continue to rely on the federal wage subsidy, rent relief and government funding programs, it can preclude a true indication of the state of the economy. That is because the support does not come close to addressing the liquidity challenges that SMBs have to overcome to trade through this crisis and return to long-term growth. And there is little appetite by policymakers anymore for spending large sums in COVID-19 relief. Most governments across the globe have indicated that they will no longer be the “lender of last resort” from Q1 2021 onwards.
A new need for invoice finance
As the world shifts towards funders deploying debt using technology-driven platforms there are opportunities for the challenger funders in the SMB sector to further their competitive advantage. By automating much of the onboarding and credit decision-making process, the cost of writing business will continue to be reduced, offsetting potential higher funding costs and higher bad debts expectations.
This means that FinTech lenders can adjust underwriting criteria resulting from the pandemic dynamically and therefore provide an ability to grow its market share in the SMB funding sector. In particular the invoice finance market, with the support of the credit insurance market, though tightened, is one that has remained largely open throughout 2020.
Invoice discounting (or receivables discounting) makes sense for a lot of companies particularly in a post-pandemic world. It allows suppliers to draw advances (typically 80 percent) against unpaid invoices ahead of its due date, with the balance of the invoice less an agreed fee (or discount) when the buyer pays in full. These days the funding process is substantially tech-enabled that is transparent, reliable, and straightforward.
Often relying on the strength of the buyer rather than that of the SMB supplier, invoice finance lends itself to a market where cash flow management is critical and where banking credit pools are reduced.
We have seen a few trends emerge during the pandemic, which makes me hopeful and proves that — with the right support — a lot of businesses can still manage to grow and scale even during a pandemic.
The bad debt costs during the pandemic has not been a disaster for everyone, and many businesses have adjusted their models to effectively weather the economic storm and to see profits again: just on a smaller scale on a lower cost base. This has enabled the lending levels to start to rise again: getting capital back out to the marketplace.
In the past few weeks there has been a marked uptick in enquiries, particularly export finance to the U.S. market. Some that have been in touch are in the exploratory and educational phase of enquiry, looking at options that are available for Canadian SMBs: hinting an increasing openness to alternative forms of finance outside of their banks.
Debtor payments have slowed by an average of nine days across the board, showing the effects COVID-19 has had on supply chains. This slowing of the invoice cycle has also been highlighted in the consistency of facility sizes but slightly reduced frequency.
COVID-19 was undoubtedly a difficult time for most businesses, with many setbacks and closures, but I believe 2021 will be a year of opportunity. The rebound that will come, coupled with the innovative FinTech funders that are willing and able to support SMBs and offering new avenues to fund growth particularly for SMBs with strong buyers.
Ian Duffy is CEO and founder of Accelerated Payments, ex-managing partner at RSM Farrell Grant Spark and chairman of several high growth companies. Ian has expertise in the venture capital and private equity markets in Ireland, the U.K. and the U.S. He is a member of the Institute of Directors in Ireland and has a special interest in technology, FinTech and alternative energy sectors.