Will factoring and receivables finance companies show quick reflexes in the context of a global energy crisis?

Author: Luiza Buserska, Corporate Communications Executive at CODIX

The economic climate, caused by the ongoing Covid-19 pandemic, continues to pose enormous difficulties for a number of economic activities and entire business sectors, including receivables finance industry. In the face of these economic difficulties, many companies struggle, and some even close down. Recently, the picture has been completed with the unbearable burden of the rapidly increasing price of electricity, traded on the so-called free market.

Giving consideration to the rise of electricity and natural gas price across Europe, governments are seeking different options for compensating businesses. The governments need to focus on the next two quarters, which carry the greatest risk for economies, through a mechanism for securing financing and payment of compensatory measures.

The main reason for the increase of the electricity price for non-household consumers is the rise of natural gas prices. In an attempt to meet this challenge, only a few days ago the European Commission called on EU member states to abolish energy taxes in order to soften the blow of high prices and even talked about creating a new model for wholesale energy market pricing. In the current model, the highest price becomes the price for everyone. In this way, billions of euros of liquidity are drawn out of the economy, which will inevitably have a catastrophic effect on business and especially on the most vulnerable players in it – small- and medium-sized enterprises.

Will factoring and receivables finance companies be able to respond swiftly and adequately to this challenge and play their positive role?

Not only that the price of gas is not expected to decrease, but rather to continue to increase in the coming years. The rise has long exceeded 30%, currently is 50% and it is expected to rise by 100% in the near future. This practically means a double increase in the price of natural gas. Whether the market can take this blow is questionable, but even if it manages to cope, the problem is that there is already panic.

After the initial wave of Covid-19, economies spun and gradually began to recover, with consumption rising significantly, while gas supplies remain uneven. In this context, there is already a drastic rise in the prices of all products, in parallel with the avalanche-like rise of energy prices. As of now, everything becomes more expensive and prices remain unrealistically high, which will inevitably affect all business sectors. For the moment European mechanisms have not yet found a way to cope with this jump, and we are already observing closure of businesses.

At the same time, economic experts continue to discuss the consequences of rising inflation. It is expected that inflation will continue to grow over the next 5 to 10 years, with a gradual annual growth of 4-5%. Some believe that inflation will not have a lasting negative effect on the world economy, but on the contrary inflation was needed because for many years it was zero or negative.

In any case, in the light of the ongoing pandemic, the drastic increase of the electricity price and rising inflation, it is still too early to estimate the size of the disaster. However, it seems that all these factors will have a very negative effect on the already fragile world economy and bankruptcies seem increasingly real. The situation is not expected to improve until March 2022, so not only some companies are expected to go bankrupt, but the question is whether the economy will not be completely blocked and what can be done about it?

In this context, what challenges do SMEs face as a result of the periodic closure of economies globally, and what are their useful moves to cope financially and strengthen their business?

In order to limit the damaging effect of the rising prices of electricity and other energy sources on their economies, countries are seeking additional, palliative and sometimes even belated measures. However, until these measures work, companies need to find a way to continue their existence. For example, it seems plausible finding a shorter delivery route or gradually moving to local supply. That, in turn, involves shifting the focus and marketing efforts to local markets. And last but not least, measures are needed to modernise production equipment and machinery for more energy efficiency, to complete the digitalisation process and to introduce optimal software solutions in order to gradually move to green business processes and adapt to the new European legislation on the green economy. As a result, all these measures will provide new funding opportunities, such as green factoring.

While many European governments have held their breath in anticipation of Brussels to finalise the details of its plan to mitigate the shock of the energy crisis, factoring and the opportunity to support many companies through this exceptional financial instrument, which allows the much-needed flexibility and efficiency, have come to the rescue. And this support can no longer be delayed.

The popularity of alternative finance providers in supply chain management was global and rising even before the pandemic. With speed and higher approval rate along with their ability to innovate and customise, the alternative lending industry has had a positive impact for both investors and SMEs.

In this interconnected world, in which we have become infinitely dependent on each other, will the factoring and receivables finance industry play its positive role in overcoming the status quo of support, and will it demonstrate quick reflexes in the dramatically changing international landscape? This is yet to be seen.

This article was published by BCR, the leading provider of news, market intelligence and training for the global Receivables Finance industry: TRF News, October 2021.

This text was featured also on the website of FCI, the Global Representative Body for Factoring and Financing of Open Account Domestic and International Trade Receivables – FCI News.