SMEs can often struggle to access finance. With more assets to underwrite loans, larger businesses are generally seen as less of a risk.
The prolonged uncertainty caused by both local and international events has added further caution to the risk appetite of banks and investors. With no sign of an end to uncertainty within the foreseeable future, SMEs must be well prepared to be able to attract finance.
“Every single investor will look at the macro environment and think that now things have become politically a lot riskier, that risk profile trickles down throughout the whole economy,” says Nikolai Hentsch, Chief Operating Officer of Arex Markets, which helps SMEs access short-term financing. “Maybe a loan to an SME will become a bit more expensive, but a loan to a larger company will also become dearer.”
While SMEs aren’t necessarily more adversely affected by the current economic environment, they have more of an uphill struggle to start with. Historically, says Hentsch, it’s been difficult for the average investor to gain access to the SME market. Pension funds, for example, aren’t necessarily going to be interested in small-scale investments. Most investors recognise it as an attractive asset class, but there are questions around how to invest in SMEs efficiently. This is being addressed through fintech solutions, which are automating elements of the process to make it easier for SMEs to access finance.
“Over the past 10 years, established banks have withdrawn from the private debt space,” says Hentsch. “As a result of that, there’s been a lot of private debt funds that have been raised to specifically deploy in platforms and money put into new creative solutions to help get capital to the SMEs.”
Investors are still trying to get the lay of the land at the moment, he says, to work out which sectors are particularly thriving and which are the most affected by current events. “Investors are probably going to focus on businesses or sectors that have more hard assets, or have a concrete inventory, so they can back up the financing.”
A politically and economically uncertain environment always encourages more scrutiny in order to access finance, says Hentsch. Companies looking to obtain funding need to be extremely transparent, offering up as much data on their business as possible.
“However, many SMEs are relatively opaque because they have much lower reporting requirements,” says Hentsch. “They can help themselves by providing as much information as possible. What investors hate the most is uncertainty. Ultimately, the better investors are informed, the more comfortable they will be with providing a solution.
“Having really good, open communication channels with their accountant can direct businesses to different potential providers.”
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