Amid Pandemic, SMBs Eye Receivables Financing

The cash crunch facing small to mid-sized businesses has sent some firms scrambling for loans, and for alternate forms of financing to help keep them afloat.

As reported by PYMNTS, many SMBs, even with loans extended by the Paycheck Protection Program (PPP), have just several weeks of cash left.

And in an interview with PYMNTS via written exchange, Raistone Capital CEO Dave Skirzenski said that SMBS face “a variety of challenges when they are being directly evaluated as a credit risk counterparty.”

Some online lenders, he noted, have stopped issuing new loans.

And traditional lending conduits through banks can be constrained through regulations such as Basel III, which make such loans cost-prohibitive.

But in the meantime, and in a longstanding trend, the larger customers of SMBs have been stretching payment terms to as long as 180 days.

Working Capital Gap

That has a negative impact on SMBs by creating what Skirzenski terms a “large working capital gap,” as they have to pay for labor, materials and other operating costs before being paid.

Their lending arrangements, he added, typically exclude eligible collateral of those receivables that are due beyond a 60-day window.

Other options, such as dynamic discounting and supply chain finance, said Skirzenski, tend to be limited to the largest 100 to 200 suppliers in a given vertical’s supply chain.

He noted that in the current environment, SMBs have increasingly looked toward receivables financing providers, including Raistone Capital (through its invoiceXcel product, which offers payment options spanning ACH, wire or card payments), as an additional source of working capital.

Drilling down a bit, the verticals most badly impacted amid the pandemic have been retail (excluding large eCommerce players), oil/gas firms and OEM-related automotive companies.

“Supply chains that provide services are also feeling the effects, as they typically lack the hard collateral used for asset-backed loans,” Skirzenski told PYMNTS.

The “sweet spot” for receivables financing includes companies with less than $100 million in revenue that sell goods and services to Fortune 500 enterprises.

“This is because their customers’ strong credit rating can be leveraged to provide cost-effective, scalable, non-debt working capital to the SMBs,” said Skirzenski.

To get a sense of how the receivables financing can give SMBs greater financial flexibility, he offered the example of a telecom services company that wins a $10 million contract on 90-day payment terms. At any given time, that service firm can be waiting for $2.5 million in payments.

“However, these same companies have to pay their staff every two weeks, as well as pay for equipment and raw materials, perhaps on 30-day terms,” he told PYMNTS.

If the SMB is able to obtain a loan against their receivables, it may be for only 80 percent of the receivables, and often for only those due within 60 days. This translates into a loan-to-value ratio of only 53 percent.

By way of contrast, with receivables finance, this same telecom services company can sell 100 percent of the face amount of the receivables, minus a small discount paid to Raistone, providing significantly more working capital against the receivable.

In a nod toward technology, Skirzenski said that trade finance is “at its core, a very simple technology problem.” The supplier selects which invoices they have submitted to their customer – and for which they would like to receive their money today instead of 60 to 180 days from now.

There’s another tailwind in place for receivables financing, he said, alongside current efforts from the government.

Asked about frustrations with the recently debuted PPP, Skirzenski said that some companies have had problems with the application process, or have low visibility of when (or even if) they will get funds.

“Receivable finance programs are a great way for firms to unlock working capital in the short term,” he said. “And the program is symbiotic with the PPP program and will not impact eligibility for the program at all.”