On Tuesday, JPMorgan kicked off the banks’ second-quarter earnings season, reporting net income of $11.9 billion boosted by a $2.3 billion net credit benefit from reserve releases.
We will soon see if lenders continue to write back the big provisions they took against bad debts at the outset of the pandemic lockdowns in 2020 and count these releases as profits.
The Federal Reserve has already allowed US banks to start paying dividends and buying back shares again. The ECB has signalled it will likely follow suit in September.
Something doesn’t add up here.
In a speech to the University of Naples at the start of July, Andrea Enria, chair of the supervisory board of the ECB, tip-toed up to it.
“We have just seen the sharpest GDP decline in peacetime for the European economy, but extraordinary policy support has meant bankruptcies and non-performing loans (NPLs) have barely reflected this.”
Loan moratoria are now rolling off; furlough schemes are coming to an end; governments are scaling back guaranteed loan programmes.
Optimists, including at the credit rating agencies, argue that support is only being wound down because economies are reopening and recovering. This is credit positive.
But from May 2020 to May 2021 insolvency filings fell remarkably, for example by 46% in France and by 25% in the UK.
The big dangers may still lie ahead.
Tighter standards
Enria says: “Banks’ asset quality will deteriorate when the bulk of the public emergency support is withdrawn,” though he admits this is difficult to quantify. However it is clear that, absent tax-payer support, private-sector credit availability will contract and the price will rise.
Banks have been tightening lending standards.
This has coincided with reduced loan demand from small and medium-size businesses through the months of government support and payments forbearance. But raising funds to participate in the recovery might prove even tougher than raising funds to survive the lockdowns.
It looks like a lot of SMEs are sitting comfortably on ample cash. But that doesn’t put them in a good place
Ian Duffy, Accelerated Payments
“The piece that remains unwritten is how many companies will not survive,” says Ian Duffy, founder and chief executive of invoice finance provider Accelerated Payments. “It looks like a lot of SMEs are sitting comfortably on ample cash. But that doesn’t put them in a good place. Their liabilities have continued to build. They will have to start paying back loans, including government guaranteed loans, and making up delayed tax and other payments at the same time as transitioning away from government support to finding working capital from the private sector once again.”
Like all of us, Duffy is talking his own book here. His company, based in Dublin, but active in the UK, Canada and the US as well as in its home country, is another to have spotted the potential of cutting-edge technology to bring new efficiency to the provision of invoice finance.
SMEs are, almost by definition, high risk. Accelerated Payments provides finance to these borrowers not by underwriting their risk but rather that of their medium to large corporate customers making good on invoices for goods and services provided by the SMEs.
SMEs seeking short-term working capital upload invoices onto the Accelerated Payments e-invoice platform. Accelerated Payments checks the credit of the invoice payer through the usual credit scoring and insurance companies, waits for the payer to confirm that the invoice is valid and connect its accounts payable system to the platform.
It then advances 80% of the value of the invoice to the SME, charging an interest rate of 1.5% per month. Accelerated Payments buys credit insurance on the invoice payer out of its margin.
When the buyer pays the invoice, the money goes into an account set up and held by Accelerated Payments in the name of the supplier.
Finally, it pays the SME the remaining cash due after deducting interest.
It takes neither liens on the SME’s corporate assets nor personal guarantees from company owners.
“We are rarely reliant on the SME to pay us back,” says Duffy. “This is non-recourse financing.”
It is clunky, inefficient and seen as last-resort lending. Invoice financing has not had a good reputation
Ian Duffy
For the SME, the cost of getting £80,000 up front on a £100,000 invoice is £1,500 if it is settled within one month, going up to £3,000 if it takes two months and £4,500 if it takes three.
The supplier retains its relationship with the buyer and has an obvious incentive to encourage early payment. Accelerated Payments only gets involved if an invoice goes into arrears.
“As well as raising finance, the platform brings some added efficiency to processing invoices,” says Duffy.
Accelerated Payments has put 35,000 invoices across the platform worth close to €400 million.
The company has seen a number of SME clients go bust, but buyers have still settled their invoices. A small number of buyers have gone bust as well, but insurance has covered these payments.
Duffy hopes that volumes will increase as SMEs now look for new ways to raise flexible, short-term working capital that the banks won’t supply.
He says: “Invoice discounting has been around for hundreds of years without ever becoming widely adopted.”
Banks have traditionally insisted on borrowers submitting all their invoices as backing for finance, charging on this basis but then only lending selectively.
“It is clunky, inefficient, and seen as last-resort lending,” says Duffy. “Invoice financing has not had a good reputation. But we believe our technology enables us to crack the problem and help make invoice finance endemic across the SME space.”
Competition
Others are competing to do the same, such as Storfund, which specializes in invoice financing for merchants on big e-commerce platforms such as Amazon.
Arex Markets recently raised an €8.8 million funding round to build in the UK and Spain an invoice finance marketplace platform so far operating in the Nordic markets. This connects companies seeking to raise invoice finance with investors through algorithm-based trading that enables SMEs to get access to cash trapped in their debtor books and helps investors to invest in SME assets directly without prohibitive transaction costs.
Banks remain reluctant to lend to SMEs, often leading to them feeling trapped when it comes to their business finances
Airto Vienola, Arex
Airto Vienola, chief executive of Arex, stated on the round’s completion: “Banks remain reluctant to lend to SMEs, often leading to them feeling trapped when it comes to their business finances.”
Of the marketplace, he says: “We’re already seeing a sharp rise in demand for this service and a willingness for business owners to finally reappraise their financing options, which have been so unfavourable for so long.”
Accelerated Payments also channels investor money into invoice finance, a change from its early days funding through high net-worth individuals.
Duffy explains: “We have recently drawn down an additional €20 million in a four-year facility from institutions with funds invested into SPVs [special purpose vehicles] and collateralized against specific receivables and debtors over which institutions have first charge.”
He sees a strong market for this asset class as institutions chase yield.
He says: “I see that continuing to develop, allowing us do what we’re good at, which is originate, aggregate, package and scale-up a book of these assets that are self-replacing every 45 to 60 days.”
Accelerated Payments acts as an asset manager of the SPVs, originating receivables and holding them to maturity.
Banks too are hungry for yielding assets. And while they might not be good at lending to individual SMEs or against single invoices or invoice books, banks might provide wholesale funds indirectly against diverse portfolios of short-term invoices payable by medium to large corporate payers.
Accelerated Payments can partner with banks that retain the prime relationship with companies, perhaps based on payments.
