Coronavirus vs. receivables financing - to what end?

Dror Shapira, Editorial Board Member of TRF News and Founder of INVIOU examines how receivables finance is affected by the recent development of coronavirus (COVID-19).

After nearly 12 years of central banks and financial markets flooding the money markets with cheap money and following the global resuscitation of the banking systems after the financial crises of 2008, we have seen a black swan* in the form of COVID-19 which has now been declared a pandemic. Subsequently, there is no doubt that this will have a significant impact on the economy - the extent of which is yet to be grasped.

I recently had to cancel my participation at an international conference in London due to (what could certainly be argued as) severe instructions from the government to enforce a self-quarantine on citizens returning from specific countries, among other situations. This instruction has now been extended to all countries, and I cannot stress enough how disappointed I was by this. I quickly came to learn that many international banks and corporates revised their travel and conferences policies for some time and until the dust has settled; the length of which is difficult to estimate at this point in time.

I would like to use this simple example to make a point in relation to the receivables financing industry. For example, let’s take business tourism: with challenged tourism and an overwhelming amount of suggested or even imposed quarantine in many countries - either mandatory or by choice - we will soon see a decline in most industries supply chain aspects. A simple demand against supply rules will dictate a new situation where some industries will hugely suffer, such as business tourism. Conferences, for instance, will be cancelled in the worst-case scenario, or alternatively will be replaced by video conferencing. Moreover, their chain of supply: venues, catering services, print, give aways industry, personnel, advertising and more will all suffer: this is just an example. It would encompass us in every direction in both in our businesses and our private lives.

This is a crisis where governments will help as much as possible under the circumstances: nevertheless, it still won’t suffice. Businesses should still find more financing solutions to this interim period. On one hand, the biggest challenge of financial institutions is to accommodate and service companies and individuals, but on the other hand it will prove hugely challenging for businesses to protect themselves against the rising risks associated with these difficult times.

One of the foreseeable risks is the slippery slope of business owners being put in a difficult situation: for example, supplying goods or services that will not be paid on time against the invoices that have been issued, or that average debtor days will increase dramatically as everyone will endure cash flow challenges , eliciting a snow ball or avalanche effect. Without prejudice, this is a tough situation to any business owner struggling to keep their head above the water. The fear is that it opens the floodgates to much more creativity in obtaining funding sources in order to withstand the storm. It may lead to creativity in the form of financing purchase orders too quickly or issuing invoices either too soon or merely on a whim. This is usually done in times of distress and not with a criminal intention, but the result is almost the same – riskier loans and either a made-up or weak collateral.

The call for action is for financial institutions and credit insurers to use whatever means they have in the arsenal to make better judgement calls and credit analysis of the clients. It is very important to keep the wheels of the economy rolling and stand by the clients in dire times and even recession, but this also offers an opportunity to other players to take a more significant roll and market share.

Now, technology can be harnessed more than ever especially in 2 aspects.

Firstly, this is in the reduction of friction as loan application will be rising significantly. Secondly, in relation to risk (and moreover, fraud), intentionally by fraudsters that aim to exploit the overload on the systems, and accidentally by desperate business owners sailing towards the straits during dark times. We will definitely see more insolvencies in 2020 and 2021 than in 2019. The faster the institutions move towards enhanced credit regimes, the more likely they will stay unharmed.