Billecta Poland Sp. z o.o.: Financial liquidity by Jarosław Grygiel

18-01-2021

Financial liquidity as a challenge for the national business sector in the perspective of 2021

The latest COFACE report, based on a publication in the Court and Commercial Gazette (Monitor SÄ…dow i Gospodarczy), has revealed some of bad news about the current condition of Polish companies, namely 75% increase in company insolvency compared to last year and the record of the decade. The current condition of the Polish companies is as problematic as it is diverse and multifaceted. On the one hand, some national companies managed to obtain considerable public aid under the Anti-Crisis shield, which has enabled them to benefit for several months from the comfort of excess liquidity. This comfort in turn could be the cause of a sin of omission: why develop a company in uncertain times when there is enough money in in cash register to pay for fixed costs?

Business survival or aid consumption?

Another things is how the external funds were finally used by the beneficiaries of these benefits: as a source of return of existing liabilities, as a liquidity buffer for future, as an incentive to invest and remodel the company's profile, for example by entering an on-line distribution channel or maybe for internal company purposes. In the latter context it shall be noted that in May this year the car dealers were selling out all their stocks due to unprecedented demand for new cars. Such a freedom in spending large amounts of money easily obtained by the entrepreneurs from the state funds may have unfavourable consequences in the view of the actual return of lock-down and the further freezing the economy until the end of 2021, in particular in some industries, such as HoReCa, event, sport, entertainment and tourism industries or malls and shopping centres, as well as sellers and retailers dependent on them – comments JarosĹ‚aw Grygiel, Country Manager Credstep Poland, an on-line factoring company. We should also mention that financial aid for companies in the form of loans granted by the Polish Development Fund (PFR) will not always be non-repayable. Failure to meet the conditions for the cancellation of most of these liabilities may result in a further wave of insolvency among companies in the second quarter of 2021.

Disappearing trade credit, increasing lack of trust

On the other hand, from the view of the factoring company, the market player whose mission is to support the financial liquidity of companies, there is a different trend apart from the seasonal (and definitely ending) excess liquidity of some players who successfully benefited from public aid programs. This trend is the reluctance of entrepreneurs to grant trade credit and its decrease. The consequence of the cancellation of the trade credit, the cheapest and most common form of financing of trade turnover, is transferring the risk of a lack of financial liquidity from the seller to the buyer, which is due to prudential considerations and the increasing lack of mutual trust between the contractors.
It’s not surprising, since with the pandemic the legislator has irrationally loosened the standards governing the possibility of initiating restructuring proceedings. According to many practitioners and experts, the simplified restructuring procedure in Shield 4.0 is the next harmful economic nod of the legislator toward debtors, including those who are volitional. It should be noted that this very quickly prepared and adopted under the pressure of historical crisis procedure is in its program simplification, informalisation (limitation of the role of the economic court) and consequences (ex. suspension of debt enforcement collection proceeding) a temptation for players who mindlessly take another loan for their company. They are given another possibility from the state to pass on the burden of the outstanding liabilities to their creditors.

Corporate finance in a closed circle of interdependence

An indirect effect of the successive reduction of the creditor protection system by the legislator is that the supply of classic sales factoring, full or incomplete, is necessarily shrinking, as well as the volume of trade. The chain of economic interdependence is simple: trade turnovers are driven by the trade credit, as the cheapest and most popular form of B2B financing, and at the same time it supports and secures factoring services. The national law system, which gives the debtor a new tool to withhold the payment of its obligations and ultimately reduce them, effectively undermines the index of trust between the players in economic trade and reduces the scale of business – with obvious fiscal effects - adds JarosĹ‚aw Grygiel from Credstep.pl. And it will not be helpful to take measures out of touch with reality by RPP to reduce interest rates (in the face of upcoming inflation), in order to reduce the cost of bank loans. It is strange that decision-making bodies did not think that the supply of loans by banks may simply not be in place. Paraphrasing the infamous bon-mot from a similar negative period for the Polish economy in our modern history: the banks will feed on their own. And not necessarily by giving cheap credits for business recovery, as the government has probably been counting on and losing its independence in RPP. The image of the small apocalypses of the Polish economy is complemented by the legislative changes in March, which are harmful to the Polish financial market, affecting the parameters of consumer loans and eliminating the possibility of profitable financing of individuals, as well as the rapid reduction of the availability of commercial insurance due to the oligopoly of insurers which is far too small to the scale of the Polish economy..

Factoring as a remedy for the epidemic of lack of financial liquidity?

Returning to the practical aspects of running business in extremely difficult circumstances: a new remedy to support the financial liquidity of buyers of goods and services may be a reverse factoring – buying, know also as debt factoring. This specialized financial product, replacing the working capital loan, will enable the delivery recipient and the importer to spread the invoice costs over a long period of time. The extension of terms and costs of purchasing goods and services through reverse factoring is a substitute for an increasingly less available working capital loan, but also for a trade credit that is practically non-existent in foreign retail trade. Reverse factoring will enable the company to purchase goods or services (often with a discount negotiated from the supplier, due to immediate payment for the entire delivery) and generate revenue over a reasonable period of time, ensuring the gradual settlement of the purchase costs to the factor, in exchange for a reasonable commission. Recently, the supply of this variant of factoring in Credstep Poland exceeded the value of completed sales factoring contracts.

In conclusion, it should be noted that the current economic situation of the Polish SME sector, largely shaped not only by the actual circumstances related to the COVID-19 pandemic, but also by the controversial system changes, significantly impedes the supply of factoring services by independent, non-banking agencies. Micro-factoring companies such as Credstep Poland, which still do not have an appropriate representation in Poland in the form of a dedicated chamber of commerce or a sectoral association, are pursuing an important mission for the national economy – they democratize the world of B2B finance, providing small and medium-sized entrepreneurs with financial solutions available only to large corporations and companies, sufficiently supported by banks and bank factors. Unfortunately, the implementation of this mission, which is aimed at supporting the development of the Polish SME segment, is currently not easy.

In the view of a rapid consumption of all the aid received from public funds and the poor prospects for an easy and quick return to economic normality, entrepreneurs may be tempted to take advantage of the ‘opt-out’ business by using the procedures provided for in the Bankruptcy and Restructuring Law, in particular the new ones in the form of a simplified arrangement procedure, in force until the end of June 2021. On all businessmen who, through their directed bankruptcy or arrangement procedure, want to solve their liabilities by short cuts will earn the restructuring offices popping up like mushrooms. However, the stigma of insolvency following the stakeholders of a failed business will be an effective obstacle in obtaining external financing for new businesses which they will open in next years, even when the pandemic period finally ends. It seems that this far-reaching side effect of restructuring, arrangement and insolvency proceedings is often invisible to those who initiate them for immediate benefit, but without a sensible idea of settling their liabilities fairly toward all creditors.

Finally, we should note that in Poland there is still a need for rational, systemic public aid, which is in the interests of both market makers, i.e., creditors and capital providers, and entrepreneurs who are really interested in adaptation and market survival, and not just in consumption of public aid and using funds from the company's cash register. This, in turn, would also give an incentive for a greater supply of factoring services, benefiting from greater security of trade, restoring the circulation of cash in the business economy.

Author: Jarosław Grygiel - representative of Swedish capital group Savelend Credit Group AB in Poland and national director of fintech factoring company Credstep Poland (www.credstep.pl), providing online B2B financing.



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