More flexibility in business loans, now more than ever

In a previous blog on whether "credits are not too commoditized" we shared some thoughts on how banks can differentiate more based on offered credit services rather than just interest rate. The blog mainly focused on private purpose loans, but similar trends and needs exist for businesses/SMEs. In this blog we won’t focus on large corporates for which tailor-made financing solutions are already quite common.

More flexible ways of credit reimbursement are even more essential for businesses than for individuals, as income flows tend to fluctuate more. The COVID-19 lockdowns, resulting in decreasing cash flows, confirm this need for more flexible reimbursement methods. At the same time governments and central banks have taken actions to authorize capital repayment holidays.

Below we give a few examples how banks can offer value-added services and flexibility for business loans:

• A good link with the BFM (Business Financial Management) tool allowing to (automatically) adjust the monthly reimbursements based on the expected incoming and outgoing cash flows
• (Automatically) initiate "Invoice Factoring" or "Invoice Financing", i.e. get immediate financing based on the accounts receivable when insufficient cash is expected for the reimbursement of medium- to long-term business loans
• Automate and advise businesses more on all kinds of government subsidized financing solutions, allowing to get government guarantees or better interest rates. Typical examples are green loans, co-financing solutions, win-win loans (where a friend or family of a company founder can finance a company in a fiscally interesting way), loans where the government provides additional guarantees (like the government-backed loan in the context of the COVID-19 relaunch measures)
• Revenue share loans where the monthly repayment is automatically adjusted to the company’s revenues, i.e. a fixed percentage of the monthly revenue is paid back to investors/lenders. As a result, such loans have variable durations, which vary with the business performance. This is an interesting construction to get investors with aligned objectives

Furthermore banks should help small and medium-sized companies in optimizing their financing solutions. This does not only include advising them on government subsidies, but also on optimizing their credit portfolio. A typical company will usually have multiple credit types, ranging from credit lines (overdrafts), to different types of corporate credit cards, business installment loans, all the way to mortgage based credits. Additionally, companies can have more sophisticated credit solutions, like Asset Based Financing (on invoices or on inventory), Invoice Factoring, Peer-to-Peer Loans, Crowdfunding, Lombard Credits, Letters of Credit, etc.

Optimizing these different loans from a flexibility, duration, pricing and collateral perspective is often hard for SMEs, as they don’t have the elaborate financing & treasury departments. A smart financing combination is the best route for optimizing the company’s funding needs.

In order to give this advice, banks should first have the necessary data about the company (i.e. real-time view on the balance sheet and expected cash flows). A BFM tool, linked to an accounting platform (like for example Silverfin, TOCO, BrightAnalytics, OkiOki, Yuki) is an excellent starting point for this. Subsequently, banks should have the necessary models to perform optimizations (where AI can indeed help), and of course the flexibility and digital setup to offer this optimization in an easy and fully automated way.