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Funding Will Be Difficult for European Small-to-Medium Enterprises (SMEs) Beyond 2022

Companies / SME Nov 01, 2019 - 03:04 PM GMT

By: Boris_Dzhingarov

Companies

Several significant regulatory framework changes are set to take effect in the European banking industry over the next two years, with the expected result being heightened difficulties for SMEs in search of external funding. The adjustments are going to make it more costly for banks and lenders to provide loans, which means that each credit application will be held to a higher degree of scrutiny before approval. As such, fewer loans are expected to be issued to SMEs – particularly those with substandard creditworthiness. Also, banks are going to pass the increased costs down to borrowers in the form of higher interest rates and fees, meaning that the process of obtaining funding as a small business will not only be more difficult but also more expensive as well.



European SMEs Already Have Cashflow Problems

According to a survey report issued by the European Central Bank, approximately 10% of SMEs have trouble obtaining approval for business funding. This creates a situation in which a substantial percentage of upcoming companies in Europe are already struggling to obtain financing, and that group is expected to increase in size as borrowing becomes even more difficult over the next few years. Fortunately, businesses that are having trouble securing financing through conventional methods may still be able to find a lender by comparing the full scope of SME loans and alternative funding options available online.

More Than 70% of EU SMEs Rely on Business Loans Issued by Banks

Alarmingly, more than 7 out of 10 SMEs based in Europe depend heavily on third-party funding provided through bank loans. That means that only about 30% of SMEs will be truly prepared for the coming regulatory adjustments because they won’t be subject to the increased cost of borrowing. In other words, the vast majority of European companies are going to find that the process of borrowing from banks will become more challenging and more financially taxing than it has ever been before.

Alternative Financing Methods Will Save Many Businesses

Fortunately, there are still a few alternative funding options that provide hope for those SMEs that will no longer be eligible for traditional bank loans. Namely, the popularity of practices like invoice factoring could increase dramatically as more businesses look for applicable short-term borrowing options in order to maintain healthy cash flow. In a factoring arrangement, the lender takes unpaid invoices and other pending payments into account when determining how much to lend, with the agreement that the borrowed funds will be paid back via an automated withdrawal from the same amount that the funds are scheduled to be deposited into.

Many SME Will Only Be Able to Borrow Against Future Revenue

In closing, the difficulty of obtaining conventional bank loans will force many SMEs to consider alternative funding options that are based primarily on proof of revenue and operating history as opposed to creditworthiness. Thus, now is the perfect time for such businesses to start building up a solid track record of routine payments and income statements in order to have a decent chance of approval for alternative factoring-based funding by 2022.

By Boris Dzhingarov

© 2019 Copyright Boris Dzhingarov - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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