The need for businesses to access fast and flexible financing is more important now than ever before. Even before the coronavirus crisis, businesses were looking to diversify their working capital options, and this will be felt even stronger now.
We recently carried out research that revealed over 8 in 10 (83%) UK, US and Chinese firms are considering switching to alternative finance providers over traditional banks for trade finance this year, which can provide access to more agile funding to help navigate the effects of COVID-19.
Over 700 senior executives at medium-large sized businesses in the UK, US and China took part in our research, revealing that even before the coronavirus outbreak, around a third (32%) of those considering switching to alternative finance providers estimate they will finance between $5m-$10m each with these sources in 2020, one in five (22%) estimate $10m-$20m, and over a tenth (12%) estimate over $20m.
This could unlock billions of capital in global supply chains and provide even greater relief for businesses struggling to rebound from the coronavirus crisis.
Companies involved in global trade are especially hard-hit. First, there is a supply shock for those companies still active, such as food providers. With production of goods being crippled, key supplies are scarce. International shipping has been thrown off schedule, so even if supplies are available, they are not reaching destinations.
In addition, like all firms, these companies are subject to a demand shock, resulting from entire workforces in the UK, Europe and the US being on lockdown, unsure about their employment status and not spending money. This situation especially hurts factories in China, whose employees have returned to work, but existing orders have been cancelled.
To provide support, central banks around the world have lowered interest rates to historic lows and relaxed restrictions around lending to firms. Governments have also worked hard to unlock billions to help businesses in need.
For example, Chancellor Rishi Sunak strengthened business interruption loans for small businesses and announced a new scheme for larger companies, ensuring that more firms are able to benefit from government-backed programmes during these unprecedented times. The pressure is now mounting to extend the scheme and increase its flexibility to make sure companies can adapt when the economy starts to pick up again.
Emergency government support is needed and welcome, but it will not be enough. In the UK we’ve already seen the collapses of Laura Ashley and Flybe, driven in part by the virus. In China we know only 10% of businesses feel they could hold out six months or longer.
We found that businesses are looking to banks and alternative finance providers for more loans to ensure liquidity in an unstable economy. Sectors that are looking to switch to alternative trade finance providers include Construction (88%), Creative Industries (88%), Financial and Business Services (86%), Wholesale and Retail Trade (85%) and Transport (86%).
Reasons for these companies looking to switch include both market and organisational dynamics. Capital requirements and compliance regulations have caused banks to limit cross-border finance activities and in some emerging markets local banks focus on large customers, leaving SME suppliers without access to bank financing.
Additionally, the rise in open account trade over the past 10 years has also created new demand for trade financing. Import buyers, often large and powerful, demand to pay for goods after 30 – 90 days or more, while export suppliers, often SMEs, desperately need payment right away to pay workers and secure goods for the next order.
The International Chamber of Commerce estimates that there is a long-existing $1.5 trillion trade finance gap, largely caused by the unmet need for global trade financing, so far not satisfied by traditional avenues.
The gap has opened the door for fintechs and other alternative finance providers to step in with products and services that are tailored to trade. These organisations are often smaller and more agile than traditional banks, which allows them to be much faster in processing funding requests and approving transactions.
In the UK alone, over three quarters (77%) of medium-large sized businesses are considering switching to alternative finance providers in 2020. Within this, a quarter (26%) estimate they will finance between $5m-$10m each with these sources in 2020, one in five (20%) estimate between $10m-$20m, and one in ten (10%) estimate over $20m each this year.
In the US, 80% are considering switching to alternative finance providers for trade financing. Within this, almost a quarter (23%) estimate they will finance between $5m–$10m each, a further quarter (23%) estimate $10m–$20m, and just under one in 10 (9%) estimate over $20m each in 2020.
In China, the majority of medium-large sized firms (93%) are considering switching to alternative finance providers for faster and more agile financing. Just under half (47%) estimate they will spend $5m-$10m financing with these sources in 2020, just over one in five (22%) estimate $10m-$20m, and just under one in five (18%) estimate they’ll finance over $20m each this year.
The Covid-19 crisis has rocked economies around the globe. Recovery will be uneven and dependent on industry sector, and there’s no doubt that companies are going to emerge from this crisis with significantly degraded financial positions. Government backing is providing much needed support and businesses are doing a noble job at trying to adjust to a quickly-changing situation.
Once the worst is over we anticipate a backlog in demand for finance which only can be funded by alternative finance providers. Businesses need to be supported more now more than ever before.