A global survey of SMEs has found a “precipitous rise” in the cost of working capital finance, as well as growing concerns over late or extended payments from SMEs’ customers.

Carried out by working capital marketplace C2FO in December 2020 and January 2021, the survey quizzed more than 6,700 representatives from SMEs in Europe, North America and Asia Pacific on their working capital health.

Though the vast majority said they had enough liquidity on hand to survive for the next six months, C2FO says there has been a sharp increase in the cost of short-term working capital finance that appears to be concentrated in the SME market.

“While it’s heartening that many SMEs in this survey have a positive outlook for their immediate future, it is also very clear that more needs to be done to provide these businesses with immediate access to the low-cost liquidity they need to grow,” says C2FO’s founder and chief executive Alexander Kemper.

Around two-thirds of respondents reported that the cost of borrowing for working capital purposes is over 8% APR, and a lack of low-cost financing options was found among SMEs in all 16 markets targeted by the survey.

In the last year, it found that the cost of working capital finance had increased by 30-35% in the UK, the Netherlands, Germany, the US, Italy and the Nordic region. The largest increases were reported in Turkey and India, at 69% and 56% respectively.

Rising costs are not solely attributed to a lack of financing options among SMEs, however, according to a report published by C2FO analysing the survey’s findings.

“[Respondents] cited a wide range of funding sources, including revolving lines of credit, asset-backed loans, factoring, government support and supply chain finance,” it says.

The issue is that uptake of those funding sources – specifically by SMEs – fell to 23% last year, down from 46% in an equivalent C2FO survey in 2017. Smaller firms appear to be reluctant not to pursue funding “beyond traditional sources”, it says.

And despite the impact of the Covid-19 pandemic on trade and economic activity, the report suggests that concerns over rising liquidity costs pre-date the pandemic by over a decade.

Since the global financial crisis in 2008, it says, many smaller or community banks have closed their doors while their larger competitors remain focused on the top end of the market.

“A certain segment of SMEs… don’t have access to capital markets like larger corporations do,” says Ashish Jain, senior vice-president and head of capital markets at C2FO. “And from a bank’s perspective, a US$5mn loan costs the same amount as a US$100,000 loan.”


Supplier payments

Another concern for SMEs is around late payments from customers, or in some cases, extensions to their payment terms. 37% of survey respondents said the number of customers who “often” paid invoices late increased during 2020.

The report suggests that due to the “widening pandemic, government shutdowns and economic instability, the response of many companies was to hold on to as much cash as they possibly could”.

“Even after the pandemic ends, the challenge of liquidity tied up for months in receivables will likely continue,” it adds, estimating that the overall amount owed to SMEs worldwide stands at around US$16tn.

Late payment practices increased most in China, Italy and the UK, the survey found, with SMEs in all three saying the proportion grew by over 40%.

For industry participants, supply chain finance (SCF) has been touted as a way of letting buyers maximise working capital while allowing suppliers to receive payment on time or early – typically at a discount.

However, SCF is not widely available in all markets, does not always extend to the smallest suppliers, and in some cases has drawn attention from regulators concerned it allows companies to build up debt-like obligations they are not required to disclose.

Efforts are underway at international level to improve SMEs’ access to SCF programmes, says Nathalie Louat, director of global trade and supply chain at the International Finance Corporation.

“We’re arranging training to make sure the specifics of that market are well understood,” she said during a recent online event hosted by the International Chamber of Commerce and the World Trade Organization.

“What we are also looking to do is provide more support to local banks to consider taking more risks on SMEs, and we are encouraging them with risk-sharing facilities where we encourage them to build their SME client base, and facilitate supply chain finance.”

Steven Beck, head of trade and supply chain finance at the Asian Development Bank, said during the same event that “deep-tier training and capacity building” around supply chain finance is underway in Sri Lanka and Vietnam – along with efforts to overcome legislative barriers in India and Cambodia.

“Supply chain finance is really not well-known or understood, certainly in most of Asia, and we see a great opportunity to close those gaps,” he said.