Alternative financing is a lifeline for SMEs under lockdown
As the UK enters another lockdown, businesses around the country - especially small companies - are fighting for their survival.
While COVID-19 rages, SME lending in the UK has tanked and liquidity has plummeted by 80% since the pandemic began.
Government-led schemes including tax deferrals and government-backed loans have helped SMEs stay alive (some continuing to trade at reduced levels, others furloughed) but cash flow problems will continue to prevail during the second confinement and beyond, as companies seek to get back to ‘normal’ trading volumes.
Funding from the incumbent banks will remain constricted, but alternate funding is available through the fintech community and can offer a lifeline for companies in most need - and companies must educate themselves about the options available.
Seek out fintech alternatives
During the crisis, equity crowdfunding sites, peer-to-peer (P2P) lending and invoice trading platforms have been successful in providing SMEs with funding solutions that use technology to offer speed, transparency and flexibility for financing that would otherwise not be available to them.
In addition, fintechs like these have been able to disperse funds with government schemes quicker than banks, because they’ve automated onboarding, ID verification and instant bank account setups. But these schemes are coming to an end and SMEs will need to source funding from non-government sources in the near future.
Ian Duffy, CEO, Accelerated Payments
“Better tailored products for SMEs and more diversified options for funding have come through”
There’s also been a shift in incumbents looking to tech-enabled lending and partnering with fintechs to fulfil demand. Better tailored products for SMEs and more diversified options for funding have come through, too.
These alternatives have helped thousands of businesses to not only stay afloat during the pandemic, but to also access the capital they’ve needed to launch new products, hire new people and expand into new markets. The hope now is that more business owners will begin to do the same and embrace what is a new age of business finance.
Surviving cash flow problems
When hard times hit, it's not just about getting the money in, but keeping the money in; SMEs need to look at preserving cash flow. Survive, revive, thrive - that’s the mantra - and there’s a fintech solution for each of these areas.
Surviving is about short-term cash loans - which are available with P2P lending and crowdfunding. Reviving is about access to working capital (without the debt!), while thriving is about securing the supply chain and keeping on top of those things to do well. These latter two requirements can be met through invoice financing, which allows companies to borrow the money they need to cover unpaid invoices that a client owes a business in a process that is transparent, reliable, straightforward and quick.
What happens is an invoice financing company funds a major part of the amount a supplier is owed in the invoice. When the invoice is paid by the client, the business pays a small percentage of the invoice amount back to the funder as a fee for borrowing the money. This financing option allows businesses to ensure they have sufficient funds in their coffers so they maintain their cash flow effectively.
While much has been made of the rise of alternative finance in the last few years, awareness among business owners remains low. We need to change this during the pandemic - not only for the survival of these companies, but for our economy as well.
BIS and MAS publish blueprint for cross-border payment idea
The Bank for International Settlements and the Monetary Authority of Singapore (MAS) has published a proposed blueprint for the multilateral linking of domestic real-time payment systems across borders.
The blueprint, titled Project Nexus, outlines how countries can fully integrate their retail payment systems onto a single cross-border network, allowing customers to make cross-border transfers instantly and securely via their mobile phones or internet devices.
The Nexus blueprint was developed through consultation with multiple central banks and financial institutions across the globe. It builds on the bilateral linkage between Singapore's PayNow and Thailand's PromptPay, launched in April 2021, and benefits from the experience of the National Payments Corporation of India's (NPCI) development and operation of the Unified Payments Interface (UPI) system.
The Nexus blueprint comprises two main elements:
- Nexus Gateways, to be developed and implemented by the operators of participating countries' national payment systems, will serve to coordinate compliance, foreign exchange conversion, message translation and the sequencing of payments among all participants. These gateways will be predicated on a common set of technical standards, functionalities and operational guidelines set out within the proposal.
- An overarching Nexus Scheme that sets out the governance framework and rulebook for participating retail payment systems, banks and payment service providers to coordinate and effect cross-border payments through the network.
“To achieve significant cost-reduction in cross-border payment transfers, enhancements must be made on two fronts: direct connectivity between domestic faster payment systems, and frictionless foreign exchange on shared common wholesale settlement infrastructures. The BIS Innovation Hub Singapore Centre is working on both. The Nexus project maps out a much-needed set of standards to achieve seamless cross-border payment systems connectivity.” said Sopnendu Mohanty, Chief FinTech Officer, MAS.
How do cross-border payments work?
Cross-border payments are currency transactions between people or businesses that are in different countries. The sender will choose a front-end provider, such as a bank or a money transfer operator (e.g. Transferwise), to initiate the payment. The receiver then receives the payment via the medium specified by the sender. Traditionally, cross-border payments flow via the correspondent banking network (CBN) which most front-end providers use to settle the payment. But, in recent years, new back-end networks emerged to optimise cross-border payments and enable interoperability between payment methods and provide senders with more possibilities to reach the receiver.
The increased international mobility of goods, services, capital, and people have contributed to the growing economic importance of cross-border payments. The value of cross-border payments is estimated to increase from almost $150 trillion in 2017 to over $250 trillion by 2027, equating to a rise of over $100 trillion in just 10 years.