7 April 2020

Managing risk as an SME during uncertainty

Businesses – particularly SMEs - are in for a tough time. But extraordinary times require businesses to look hard at the ‘ordinary’ things, like risk and cash management.

How am I going to pay staff and suppliers when I know my sales and revenue are about to get hit? I have cash to last another three months, and then what? Will I be able to borrow? Will we lose business because we can’t get our staff across borders?

These are questions being posed by many of Singapore’s 200,000 small and medium-sized businesses that are exposed to the extreme economic conditions caused by Covid-19 pandemic.

With the inevitable knock-on of sluggish revenues, tightening liquidity and a freeze on travel, here are some suggestions that SMEs should be considering to manage their risk, liquidity and cash management approach.

These steps might seem simple, but they are often overlooked.

They include planning ahead to evaluate upcoming cash inflows and outflows, being diligent in preparing invoices, monitoring the collection of receivables and real time reconciliation gives a clear and true understanding of a business’ cash position.

Once businesses have this nailed down, they will be in a far better position to make informed decisions on whether they should be borrowing to supplement their working capital.

Clients who in the past who have a lot of cash must not be complacent. If they still have ability to tap on loans, they should do so.

The Singapore Government has announced $59.9 billion of fiscal stimulus, or about 12 per cent of Singapore’s gross domestic product (GDP). There are support measures for enterprises which each business owner need to be aware of.

Notably, the a number of measures originally introduced at the Budget Statement in February were beefed up significantly.

The SME Working Capital Loan has increased from $600k to $1 million, and the Government has announced it will raise the risk share of loans to 90% - enabling us as a bank to widen the breadth of our book beyond normal risk thresholds to extend liquidity and repayment flexibility to our clients.

The Temporary Bridging Loan Programme – originally available to the tourism sector – has now been expanded to all sectors and enables borrowing up to S$ 5million.

SMEs that have already tapped the working capital loan can now lean into the bridging loan programme for additional headroom; it will make a lot of difference.

There are several other measures which can be leveraged as well, including the one-year deferment of capital payments and the Enhanced Loan Insurance Scheme.

The current conditions are causing having a significant impact on foreign exchange fluctuations, liquidity and credit availability. While it is too soon to know how the situation will pan out, there are a few questions worth considering now:

  • What is my liquidity position? In time of headwinds, businesses can be faced with a cash crunch so it is important to assess if there is enough liquidity over the foreseeable future or if the business needs to borrow or raise capital.
  • If borrowing is necessary, then what will be the future cost of borrowing? Knowing the maturity dates of any existing loans is critical too. If refinancing is required, start those discussions with lenders early to remove the uncertainty over credit availability and its cost.
  • How do I approach my FX positions? Companies may consider making alternative arrangements for themselves or suppliers in order to remain buoyant, such as shifting supply from or sales to other countries. This raises the need to understand changes in FX exposure and reassess how the attendant risks are being managed and value protected.

There are several alternative solutions that can help release cash previously caught in the sales cycle to cover your day-to-day expenses. Having this cash flexibility enables you to pay suppliers faster and to negotiate more favourable rates and terms.

Some of these solutions include receivables finance, which is a financing arrangement where a business receives finance against the outstanding balances of invoices that have been billed, but not yet paid.

Speak to your bank about whether they offer streamlined receivables finance products to get access to funding in a faster, simpler manner.

A company can also look at renegotiating the terms of trade, that is, on imports or purchases. For example, instead of making advance payments in cash, negotiate for open account terms or issue letters of credit so as not to lock-up cash unnecessarily.

If you can’t deliver your commitments, talk to your buyers. Big businesses want to keep their supply chains intact and are open to discussions.

Consider supply chain finance, which is a set of automated solutions that allows buyers to provide their suppliers with the opportunity to receive early payment on approved invoices at a discount.

Another area is guarantees – some businesses will be experiencing delays in receiving shipping documents from counterparties due to the coronavirus. Shipping guarantees can be used to smooth the transition of goods; we’ve introduced a new measure to expedite the issuance of shipping guarantees to within one hour to facilitate timely manner for clearance of goods.

The pandemic has pushed businesses towards a more virtual environment but it is also revealing how operationally paper-dependent many companies are in areas like payroll, payments, and authorisation arrangements.

Many of these can and should be shifted to digital and the transition is not as overwhelming as expected. In these times, banks are providing extra resources to help businesses make this transition so reach out.

In summary, the economic impact of the coronavirus to people and companies will be profound.

The questions this pandemic raises for any business are tough – but they’re real and they need to be addressed.

But whatever the future is, SMEs who review and manage their risks and have a clear working understanding of their working capital and liquidity will be in a stronger position to weather the storm of uncertainty and safeguard their future.

A contribution piece by Li Lian Ng, Head of Business Banking, HSBC Singapore. A version of this piece was first published in The Straits Times on 7 April 2020.