Why SMEs should consider export factoring when seeking funding

We are living through exceptional times and things are changing at a dramatic pace for businesses across the country. SMEs require urgent financing – particularly through today’s testing times when cash flow can make or break a business.

While banks are known for lending during good times, they have a tendency of pulling the plug when things get ugly and funding is needed the most. Therefore, many businesses often shy away from finance arrangements that carry a high possibility of burning them if times get tough. Moreover, since legacy banks have various revenue streams and cross-sell opportunities, at times this means they are not particularly concerned about attrition rates when it comes to their clients.

Hence, the ongoing liquidity crunch will most likely be exacerbated further, as banks become more conservative and scale back lending due to tougher, more stringent credit policies.

Factoring can provide the much-needed liquidity boost SMEs require, more so than ever before. By using export factoring, a company can finally entertain the idea of taking risk to sell on credit.

Export factoring provides a full suite of trade finance benefits, including cash advances, credit protection, and collections and reconciliation services.

If SMEs look at a factoring arrangement, they stand to get cash-in-bank, while a select amount of receivables are removed from their balance sheet. This results in improved leverage for the company, giving them room to grow. Naturally, this results in accelerated cash flows without the burden of associated debt.

Not only is funding immediate, but export factoring is also an easy process – from the application to the account setup. It eliminates the rigid requirements that most SMEs face when seeking a bank loan. With less hoops to jump through, smaller companies can get the liquidity they need in order to focus on their core business and growth goals.

There are also other challenges that come into play with traditional financing that can be difficult to pivot around. Bank services can provide funds that are limited or exhaustible, but funding from export factoring can grow as a company’s orders and invoices increase. Such scalable financing enables SMEs to commit to higher volumes of orders, knowing that they will have enough cash on hand while paying for other expenses involved in running a business.

Due to its meaningful contribution towards improving visibility and control, factoring will be in high demand during the current crisis and after, as SMEs seek alternative sources of working capital financing.

Factors to consider

It is not entirely feasible to treat factoring as a quick-fix or short-term bail-out. Smaller companies should first ensure their books are completely in order. They must also have a goal and a game plan in mind as they begin to apply for funding.

At Tradewind Middle East, which is regulated by the DFSA, we look for accurate information and conduct background checks on all the buyers we intend to take exposure on. We study a company’s balance sheet, its receivables, and its order book for future order volumes.

From the receivables, a select portfolio is shortlisted according to volumes and repayment morality, and a credit insurance check is conducted. If limits are available, we inform the client of our ability to take exposure domestically, and even on a cross-border basis.

Further, we monitor – on the company’s behalf – risk concentrations and credit insurance ratings in order to mitigate and steer through any adverse developments – something which may not be entirely possible by the company alone. Such a service allows for the company to focus on its core business and for it to identify new avenues for growth.

Finally, one might wonder what happens in case of buyer insolvency. This is where the benefits of trade finance companies come into play – they can file an insurance claim against the buyer. For this purpose, through its insurance partners, the trade finance company may provide the insurance, or the company can choose to assign their insurance to their trade financier.

All in all, bespoke trade finance institutions are altering the finance landscape for SMEs and many other companies in the region, providing them with the opportunity to grow their businesses, and without the constraints they would generally face if they were to seek traditional financing from a bank. It’s no secret that the backbone of economies are SMEs, and when equipped with powerful, alternative trade financing tools – they can at last flourish and grow unfettered.

Peter Maerevoet is the global CFO at Tradewind Finance and senior executive officer at Tradewind Middle East Limited