Financial panacea for the small ones - portfolio guarantees
It is common to say that you are at the biggest risk when you are afraid of taking risks. However, for small and medium-sized businesses that are looking for opportunities to develop and innovate it is not enough to be daring - a reliable financial backup is needed. Daiva Šorienė, Deputy Chief Executive Officer of Šiaulių Bankas and Head of Sales and Marketing Department, speaks about the financial challenges most often faced by small enterprises operating in the regions and what financial medicine could work for them best.
Daiva Šorienė says that successful small and medium-sized enterprises (SME) in the country's regions are more cautious about their development than their rivals in big cities, but they also are brave enough to use favourable economic conditions for their own benefit.
"Small and medium-sized enterprises try to actively use the upswing of an economic cycle for their investments: they aim to improve and expand their performance, go to foreign markets or develop within the country. If at the beginning of the economic upswing development and investment challenges are more relevant for companies located in big cities which respond more courageously to a better situation in a country's economy, regional SMEs become more daring with the growth of the cycle", says D. Šorienė.
It is irrational to evaluate by stencil alone
According to her, it is natural that one of the most important source of corporate financing are banks, in fact, it is not always easy for small businesses to qualify itself for traditional bank financing.
"Companies apply for the bank’s financing when want to assure a flow of working capital or attract investment. A company may need additional working capital or funds to acquire production equipment, heavy truck traffic, or IT business management system, etc. Our experience shows that it is sometimes difficult for regional SMEs to qualify for funding - if their situation is assessed by stencil alone and the context is ignored it may turn out to be a too risky for banks to finance such companies", explains Ms Šorienė. - Frequently, an SME cannot borrow because it does not have enough collateral or collateral is inappropriate. SMEs in the service sector often find themselves in such a situation - they work on rented premises, do not have real estate, production facilities, or other tangible assets that can be pledged. It is precisely for this reason that it is very important for the bank to assess the situation of each business individually and look for alternative possibilities to finance a company that wants to grow. "
There are some ways
The financial expert states that such companies may take advantage of financial instruments with guarantees.
"Through the company Investicijų ir verslo garantijos (Invega) the state has activated a process of loan guarantees, which considerably facilitates the financing of SMEs. Šiaulių Bankas offers the widest range of instruments with guarantees. In this case, a certain part of the loan is guaranteed to the bank, therefore, the bank can also finance those companies for which other traditional sources of financing would not be available", says p. Šorienė.
Vytautas Žemaitis, Director of Corporate Clients of Šiauliai region and branch, reveals possible loan origination scenarios.
"For example, a manufacturing company that plans to buy equipment usually applies a bank for a loan. As collateral, the equipment itself is offered. As a rule, all banks estimate that production equipment as collateral is worth about 50% of its price. This means that equipment costing 100,000 euors will be valued by the bank at EUR 50,000 as a collateral, and the rest of the funds will have to be collected by the company itself or additional collateral will have to be provided "- explains Mr Žemaitis.
According to him, in this case the best option is leasing with a portfolio guarantee.
"Even if the company does not have appropriate collateral, the guarantee reduces the risk of lending to the bank, so it can make a business-friendly decision", - illustrates the interlocutor.
When small and medium-sized companies want to borrow money to manage their flow of funds, they also need collateral that is not always sufficient to obtain the desired loan amount. In this case, measures with portfolio guarantees also allow borrowing on favourable terms.
"Companies need to borrow for working capital for a variety of reasons. It may be necessary to quickly buy a large amount of raw materials as this will reduce the cost of production or because of sales volumes of the company have sharply increased. But sometimes companies acquire long-term assets such as production premises, facilities or car using their working capital and then are short of it ",- says Mr Žemaitis. - There are cases when a good offer to acquire long-term assets occurs, the decision has to be taken quickly and the company pays with its working capital. But then the consequences of this action are to be dealt with. In such cases, the bank has solutions that help the company to return to balance. Options may vary, therefore a suitable financial instrument can be offered only after discussing the specific situation and evaluating the financing possibilities. It can be said that the mission of the bank is similar as of pharmacy: to consult and offer the most suitable medicine".
Most recent portfolio guarantee instruments relevant to business
Portfolio guarantee for leasing
This is a fairly new financial instrument, offered to the market at the end of last year. It is attractive for small and medium enterprises because it allows buying equipment for up to 1.9 million euros and there is no need to pay a down payment. Invega guarantees up to 80% return on the first loss to a financial institution.
Useful when: the company wants to buy new equipment. The guarantee through Šiaulių Bankas has been successfully used by the catering company that purchased new kitchen equipment, construction companies that leased special equipment and special transport, a printing house, and a company in the robotics sector that, after using the guarantee, will soon acquire machinery tools that cut with accuracy of nano particles .
Portfolio guarantee for factoring
A factoring is a service when a bank pays a company 70-90% of the buyer's debt as advance within 24-72 hours from invoicing to the buyer. Upon payment expiry (usually no longer than 4 months), the buyer pays money to the bank which returns the balance to the seller. With this instrument launched in April this year, a guaranty applies to 80% of factoring transaction amount.
Useful when: it is necessary to quickly and easily manage working capital flow. Factoring allows the company to receive money faster than the buyer pays, and the insured factoring is also a means of protecting customers from insolvency as the customers' risks are assumed by the bank. The portfolio guarantee for factoring is especially relevant for those companies that have already used up the insurance limits granted by insurance companies, and companies that export to eastern countries (including Ukraine), as well as for construction, road building, and furniture manufacturing companies.
According to Daiva Šorienė, Deputy Chief Executive Officer of Šiaulių Bankas and Head of Sales and Marketing Divisions, SMEs operating in the regions should look for alternative financing options.