'Desperate times call for Innovative measures!' - New Opportunity for SME and FI

“What do you call China – Villain or change-enabler?”

You can call whatever, but China, as a country, has magnificent impact on the globe. According to Worldbank, China’s share of global GDP in 2019 was 19.24%. This number indicates, how Chinese economy is weaved into the global economy. And the latest product from China is – ‘Coronavirus Disease (COVID-19)’! 

As the ancient Chinese proverb says – “Be not afraid of growing slowly, be afraid only of standing still!” –

 And guess who is standing still now? It’s not Chinese firms, but American and Rest of World’s small to mid-size enterprises/business (SME) sector. With government forced lockdown or shelter-in-place orders, SME sector is facing acute cash crunch as the complete economy is at halt. The operating cash flow since the inception of the lockdown orders has experienced sharp decline and pushing them on the verge of bankruptcy. Of-course the situation will heal with time and business will be back to normal, but experts’ opinion on the time range varies from 6 months to 2 years. That is quite a range! SME want to thrive through this difficult time, but credit facility is not easily available in the market, at-least not on SME favored interest rates. 

Central governments of respective countries are taking measures like the Coronavirus Aid, Relief, and Economic Security (CARES) Act by US ($2 trillion economic relief package -Payment Protection Program (PPP) for small businesses) and similar stimulus packages by other countries. This is an example of ‘Desperate times calls for desperate measure’.

However, it is perfect time to pioneer a new financial product in this financial services industry – “Qualified Credit Options”. 

This can be considered as an extension of pre-qualified credit/loan and Options trading concepts. In simple terms, when business is running as usual, it will make certain contract with financial institutes or lenders that under certain conditions, business have right to avail the credit facility but not under any obligation. In return, financial institution can charge certain premium.

 Closer Look –

1. Qualification Process: Certain credit reporting agencies Equifax Small Business, Experian Business, Dun & Bradstreet and CRIF are already playing the role of Business Credit Bureau. These credit bureaus can leverage ‘Open Banking’ platform to connect all accounts of any business and understand cash flows, revenues, expenditures, bank balances, etc. of any SME unit. Next logical step is to build confidence time interval and forecast revenue. If required, expertise of accounting domain can be integrated.
2. Credit Option – Right, not Obligation: Based on business credit score, financial institution/lender and SME can create a smart contract on ‘Blockchain/Distributed Ledger’ Technology (or even simple legal contract). SME will pay certain premium as a beneficiary of the contract where interest rate, credit or loan amount, tenure for credit facility are in favor of SME based on its score.
3. Smart Contract Execution: Now, when any unfortunate situation hits industry then based on smart contract parameters, SME can exercise the right for the loan. Needless to highlight that under some extreme conditions like recession, contract can be modified. There is a scope of adding various parameters from economy, industry, local perspective.

 You can relate this strategy with insurance industry – for example -The Wimbledon tennis tournament had the foresight to buy around £1.5 million (US$1.9 million) per year in pandemic insurance following the SARS outbreak in 2003. Paying out roughly £25.5 million (US$31.7 million) in premiums over that 17-year period, Wimbledon is set to receive an insurance payout of around £114 million (US$142 million) for this year’s cancelled tournament.

 But insurance comes into the picture only after an individual or entity faces financial losses and then insurance company will reimburse it. Qualified Credit Option can address the gray area when business is temporarily not doing well and complete loss.

 Imagine - Wimbledon 2020 matches with completely empty stands, no audience, no sponsor… ???