COVID-19 and Its Unsung Domino Effect to SMEs

by Maureen Ledesma

We have been listening to news and social media sentiments about the problems this new coronavirus has brought our lives. The supply chain has definitely not been spared. Although the headlines we may see are those of publicly listed companies in a stock market bloodbath and laying off employees etc, the domino effect to SMEs have been unsung and the effects are quite alarming and we may only be in the early stages. 

In our info graphic below, we take a closer look at the Airlines industry whose stocks tumbled the worst as the corona virus spreads. China Airlines posted record breaking losses of USD3B incurred for a single month in February 2020. Locally, our Philippine Airlines (PSE:PAL) stocks dropped to P5.00 per share, its lowest since 2006. United Airlines warns of worker layoffs without government bailout.   

How about the supply chain? What do we hear about them? Is ABC Plane Food Inc, or XYZ Airplane Fuel Inc still receiving purchase orders from China Airlines, Philippine airlines, United Airlines, etc given that a big number of flights and routes have been cancelled?

SMEs not only see less purchase orders from their biggest clients. 

– Worse, they are eventually made ‘creditors of last resort’. What do we mean by that? It is when large customers (like the airlines for example) become momentarily insolvent and ASK FOR DELAYED PAYMENTS. As an SME with zero negotiating power against these large clients, there’s nothing they can do. Unlike the airlines, SMEs don’t get bailed out by governments. And often, SMEs cannot dictate to get paid right away even when their customers are bailed out of insolvency. 

What other supply chains and industries do you think are hit badly by the new corona virus and the resulting government lock downs? Keen to hear your thoughts. 

Posted in Risk Management Tagged , , , , , , , , , , , ,

Letters of Credit versus Trade Credit Insurance

Both Letter of Credit and Trade Credit Insurance are tools used by exporters to lessen the risk of selling to foreign buyers. But how are they different? Here is an infographic comparing Letter of Credit and Trade Credit Insurance.

by Jessica Manipon

If you are in the exporting industry, particularly selling goods to other businesses abroad, you might have come across an instrument called “Letter of Credit”. In the Philippines, this is one of the most common ways an exporter secures payment from their foreign buyers.

We have discussed in many ways how trade credit insurance can protect a business’ receivables from non-payment of their buyers, but comparing Letter of Credit (LC) and Trade Credit Insurance (TCI) can be confusing. Here is a visual guide showing the differences of TCI and LC.

Posted in Risk Management Tagged , , , ,

Top 4 High-Profile Corporate Insolvencies in the PH

There’s an unnecessary sense of confidence that big companies are unlikely to become insolvent. Historical accounts serve as the best examples. Here are four of the high-profile corporate insolvencies in the Philippines.

by Randolf Santos

Corporate insolvencies still elicit discomfort among Filipino businessmen, especially for those who suffered significant losses from their investments. An insolvent business simply means that investors somehow feel that it’s their fault for being unprepared, and nobody likes to admit that they failed to foresee the unexpected.

Business owners should acknowledge that while insolvencies remain taboo in the corporate world, it can happen to any kind of company. There’s an unnecessary sense of confidence that big companies are unlikely to become insolvent. Historical accounts serve as the best examples. Here are four of the high-profile corporate insolvencies in the country:

ASB Group of Companies

The group of energy and petrochemical companies filed a petition for rehabilitation with the Securities and Exchange Commission (SEC) in May 2000. The SEC Hearing Panel granted a 60-day suspension of payments shortly after ASB Group filed the petition, due to the inability of paying their obligations within one year. This allowed the company to become technically insolvent and qualified for rehabilitation based on SEC rules.

ASB Group had P5.38 billion of assets at the end of 1999. They owed approximately P8 billion to five major banks and 700 unsecured creditors comprising contractors, individuals and suppliers in the Philippines. The SEC approved the company’s rehabilitation plan in 2001. Part of its plans to reduce debt involves the sale of their ongoing projects, payment in kind transactions and real estate divestments.

Uniwide Group

Uniwide became a household name in the late 1980s until the 1990s with their competitive prices for consumer goods. Sari-sari store owners flocked to their shopping malls for this reason. In fact, the company even had to curb foot traffic at their establishments during the peak shopping season in 1988.

The company’s troubles apparently began in 1998 with a poorly managed rehabilitation plan that ultimately led to liquidation several years later. The SEC already described the company as insolvent since 2003. Cash flow seemed to be the initial problem of Uniwide during the late 90s, as suppliers had decided to stop transactions with the company because of non-payment for previously delivered goods.

The situation became worse when creditors began to chase after the retailer. By 2013, the SEC issued a liquidation order after Uniwide’s liabilities exceeded its assets. It also didn’t help that the group already lost its market share to emerging competitors like SM. A court order in 2017 for liquidating Uniwide’s assets seemed like the proverbial nail in the coffin.

Victorias Milling

The company is the biggest sugar manufacturer in the Philippines, but the Asian financial crisis in the late 90s proved to be a bigger force. Victorias Milling sought debt relief in the midst of bankruptcy in 1995. Its dire financial situation can be attributed to the cheaply priced imported sugar, unmaximized production capacity, debt for expansion and repairs.

By 2013, the company bounced back after establishing a creditor-driven program to settle P4.4 billion of restructured debt and redeem issued convertible bonds. Victorias Milling agreed to a 10-year debt settlement in December 2018 to avoid further lawsuits from creditors, who were particularly after the company for roughly P1.2 billion of outstanding loan balances.

Hanjin Heavy Industries Corp-Philippines

Hanjin’s troubles started in 2009 when it lost US$1.1 billion from the global financial crisis, which also incurred US$15 billion of losses to the container shipping industry. In 2010, the Eurozone crisis affected the South Korean company’s trading activity between Asia and Europe. The regional business accounted for almost a quarter of its revenue in the same year. By April 2016, the Korea Development Bank took management control of Hanjin that signaled the severity of the company’s problems.

The embattled shipping company filed for receivership in August 2016 in South Korea, but its impact reached the Philippines due to five local banks that collectively lent US$412 million to the company. The company’s suppliers, however, filed for P48 billion (around US$923 million) of claims in February 2019.

Conclusion

Banks represent the major creditors of these companies that are insolvent or once filed for bankruptcy. If they struggle to collect payments, then it’s hard to imagine the plight of individual creditors and smaller businesses from recovering their losses due to unpaid invoices.

We emphasized the importance of credit management tools in another article, including trade credit insurance. It protects a company’s receivables from non-payment caused by insolvencies or bankruptcies. Vesl is an online platform that gives access to “pay per invoice” trade credit insurance for businesses. 

References

Posted in Risk Management Tagged , , , , , , , ,

US-China Trade War: Why PH Has Just as Much to Gain and Lose

An Asian Development Bank statistician believes that the trade war between China and the U.S. will be a boon for manufacturing companies in the Philippines.

by Randolf Santos

Manufacturing companies in the Philippines may gain more business because of the current trade war between China and the U.S., according to an Asian Development Bank (ADB) statistician.

Beijing and Washington may have held talks as of December 2019 to find common ground on the conflict, despite billions of tariffs already imposed on certain goods from both countries. The U.S. so far implemented US$550 billion of tariffs on Chinese goods, while China’s tariffs covered US$185 billion of U.S. imports.

How PH Manufacturers Will Benefit

ADB statistician Mahinthan Joseph Mariasingham predicted a higher manufacturing activity in the Philippines by up to 0.7%. Agriculture, automobile and technology trade comprise some of the hardest-hit sectors by the trade war.  Electronics manufacturers might acquire new business from companies in the Asia-Pacific region, as they don’t want to get caught in the middle of the trade war. Japanese companies like Kyocera, Nintendo and Sharp have decided to exit China and move some of their manufacturing operations into Vietnam.

The Trade War’s Beginning

The trade war between China and the U.S. seemingly began in July 2018 when the first round of tariffs affected 818 Chinese goods. U.S. President Donald Trump ordered a 25% tariff on US$34 billion of products at that time. Chinese President Xi Jinping responded with their own tariffs starting with an estimated US$50 billion of U.S. goods in the same year.

China and US Interests

Trump has been vocal about his plans of imposing tariffs since he was still running for the White House. According to him, the U.S. has been at a disadvantage in international trade stemming from China’s unfair trade practices. China has claimed that Washington only wants to gain the upper hand by intruding on the Asian country’s economic and industrial sovereignty.

The two superpowers have deeply intertwined economies with the exchange of goods from consumer goods and electronics to construction materials. In 2018, the U.S. imported approximately US$539.5 billion of Chinese goods. U.S. exports to China only reached US$120.34 billion in the same year. The U.S. may have more to lose from the dispute, but experts believe that there are no clear winners from the ongoing trade war.

Why Everyone Loses

The tariffs can affect demand for different products made in China. The components for manufacturing those products are imported from other countries. If enterprises and consumers buy fewer products to avoid paying a higher price, then the weaker demand will create a ripple effect in international markets. Suppliers and traders need to be more agile and clever in navigating these changes.

Conclusion

Manufacturing companies in the Philippines shouldn’t be too happy about the trade war, even if it seems that some multinational companies want to shift their production from China or the U.S. into the country. The long-term effects and implications of this trade war are clear: manufacturers, traders, and other suppliers in the industry need to be insured against the impact of the ongoing trade war. Contact us today to find out how you can protect your company’s business.

References:

Posted in Risk Management Tagged , , , , , , ,

Non-Paying Clients Cause 1 Out of 10 Invoices to Be Delinquent

Trade credit insurance protects small and mid-size businesses in the Philippines against the risk of loan default, which can happen due to delinquent invoices.

by Randolf Santos

Has your business attracted more clients over the last 12 months? While this brings an increase in profit, your risk exposure to unpaid invoices grows at the same time.

Small and mid-sized enterprises (SMEs) in the Philippines often overlook the importance of trade credit insurance to cover unpaid invoices from their clients or end buyers. Some business owners believe that revolving credit lines and bride financing loans already protect them from delinquent receivables. However, most of them fail to analyze the probability of defaulting on their debts because of non-paying customers.

Do You Have Too Many Pending Invoices?

On average, receivables comprise over 40% of SME assets, according to Benel Lagua, Development Bank of the Philippines executive vice-president. Out of these receivables, Lagua claims that one out of 10 usually becomes delinquent. This means that if you trade at 10% margin you have to sell 10 times more the value of your delinquent invoice just to make up for the loss.

Aside from non-payment, you have to think of the possibility of delayed liquidation of receivables which is also detrimental to your business. If you financed your invoice, your lender may have already imposed late payment fees for your inability to settle your short-term debt on time.

With these risks in mind, it is important to find ways to secure your receivables. These include selling your invoice via factoring entities, creating a liquid account solely for bad debt reserves, and trade credit insurance.

What Are the Benefits?

Trade credit insurance coverage for businesses guarantees payment of up to 90% of delinquent invoices. Your receivables become delinquent or unpaid when your clients file for bankruptcy or insolvency.It also protects you against protracted default or delayed payment, which manifests when a client can’t settle their financial obligations within six months from the original payment due date. These commercial risks are especially high when there is global recession or even industry developments that certain firms cannot adopt to

Aside from commercial risk, trade credit insured businesses also reduce their exposure to political risks that are beyond their clients’ control, such as terrorism or war, hence affecting their capacity to pay on time.

You can choose between export credit insurance and domestic credit insurance. The latter refers to coverage for businesses that only cater to buyers in the Philippines. Companies with overseas buyers and clients should consider adding export credit coverage to their insurance policies.

Which Companies Need Insurance?

Businesses in the construction, exporting, manufacturing and trading industries usually offer payment terms to their clients, and will therefore benefit from protection against buyer payment default. This does not only apply to local buyers, but especially to foreign ones. In fact, the effect of a payment default from a foreign client may be larger, given the difficulty of collecting payments offshore.

In the U.K., government data showed that several companies already declared insolvency in the second quarter of 2019, due to the growing political and commercial uncertainty from Brexit. With a 12% increase in the same period, the level of insolvencies has reached the highest since 2014.

SMEs in the Philippines should also look out for signs of growing political tension because of the U.S. and China trade war, and the Hong Kong recession, largely because of ongoing protest movements in the autonomous region.

How Much Does Insurance Cost?

Trade credit insurance in the country remains largely unused, especially by small businesses, despite a continually changing financial system. Luckily for SMEs, it’s now easier to find a trade credit insurer through online platforms. One of these, financial technology companies,Vesl, gives SMEs access to trade credit insurance paid on a per invoice basis, making it practical and affordable.

The actual cost of insurance depends on your buyer’s risk, with additional fees to have your buyers assessed. You can register on Vesl’s platform for free to start the process.

Conclusion

Trade credit insurance coverage may not recover 100% of your unpaid invoices, as it is a mitigation tool to recover some loss rather than losing everything. Insurance coverage not only prevents you from experiencing a slimmer profit margin. It also ensures that your creditworthiness for small business loans doesn’t take a negative hit. If you constantly engage in net 30, 60 or 90 payment terms, your risk exposure to defaulting buyers remains high even when you successfully expanded your customer base over the past year.

References:

Posted in Risk Management Tagged , , , , , , ,

Is Your Buyer Asking for Better Payment Terms?

Here are 5 Things you MUST know about your buyers before you do that.

Firstly, what are payment terms?

These are the terms that you, as seller, set to communicate to your clients when you would be expecting their payment. These terms are usually found on the contract and on the invoices relating to that contract.

Common invoice payment terms:

CODCash on Delivery
PIA/CIAPayment in Advance/Cash in Advance
Net 7Payment after seven days of invoice date
Net 10Payment after ten days of invoice date
Net 30 Payment after thirty days of invoice date
Net 60 Payment after sixty days of invoice date
Net 90 Payment after ninety days of invoice date
EOMEnd of Month
Letter of Credit A documentary credit confirmed by a bank, often used for export

Providing better payment terms is a sign of having good faith to your buyer. It’s actually sometimes called giving credit terms because essentially, you’re providing credit to your buyers – to pay later. You’ll find that sellers who do this tend to be aggressive in closing deals. Giving better payment terms is good if you are poising your business to grow.

So, if a new buyer asks for better terms, before jumping in to say yes (or no) right away, you need to first conduct proper buyer due diligence. You can do this by purchasing a credit report from a credit reporting agency or you can do it yourself.

Here’s how you do it yourself – the least you can do

5 things you should ask for from your buyer before giving payment terms.

1. Basic info: Name, address
2. Legal status: Date of establishment, identification number
3. Business activity description: distributor, wholesaler, etc.
4. Trade references: commercial morality (are they involved in any past litigations?), payment history, and agency credit scores if available
5. Financial condition: past and current financial records

There’s nothing wrong erring on the safe side.

Chances are, when you’re applying for trade credit insurance or trade financing for your transactions, the information above would be the same data insurers and lenders would ask about your buyer. Availability of these data can smoothen your applications too.

Disclaimer: The views and opinions expressed by the author does not necessarily reflect the official policy or position of Vesl Pte Ltd. Should you wish to contact the author of the blog, you may do so by contacting her here.

Posted in Risk Management Tagged , , , , , , ,

The Untold Story of International SMEs: An Entrepreneur’s Perspective

Ambitious and cautious, Green Mint Pte Ltd is an international trading business what has grown in folds over just a few years thanks to its founder’s ability to seize opportunities and try out new things.

by Maureen Ledesma

This blog focuses on Green Mint’s founder and CEO, Vaibhav Gupta, who shares his inspirations, struggles, and vision for his company.

Know Your Heart’s Desire

According to Vaibhav, when he was still in college, he had a vision that he will start a business as he doesn’t find himself suitable for a regular job. He’d get bored and would want to make more money than being an employee. However, he understood early on that he needs to learn how everything in business works, and he knows it won’t be easy.

“After college I gained experience from various business houses and learned the importance of purchasing and financing.”

In 2012, three years after college, Vaibhav opened up Green Mint which is a company trading various metals.

“I started making money and I realized the potential of what I’m doing. If I add volume to my trades, I’ll definitely make more money.”

According to Vaibhav, he would not be here without his business partner whom he also considers his mentor. Vaibhav took over Green Mint upon the retirement of his partner in 2016. In addition, Vaibhav recognizes the support of his wife and his family in developing this business.

The Struggle is Real

We asked Vaibhav on his biggest challenges in starting and growing Green Mint. According to Mr Gupta, their biggest challenge when starting was maintaining cash flows and finding the right banking partners who can then later provide lower cost of funds.

“Biggest challenge for us is to obtain fund at a lower cost. Big players in the market have low cost funds and had done vertical integration, whereas players like us have high cost of funds. Finding capital for vertical integration is a big task.”

Be Brave to Try New Things

Vaibhav’s go getter nature to take advantage of opportunities and his courage to try new things in trade finance rewarded him and helped him grow his business. One of Vaibhav’s buyers wanted open account payment terms, 60 90 120 days. He was hesitant to offer payment terms but, since it’s good business, he looked around for solutions to minimize his risks.

“One of my buyers told me that we can have trade credit insurance on them so I’m comfortable to provide a credit period. When I was searching for credit insurance, I found Vesl. Main distinguishing factor between others and Vesl was that Vesl was providing per invoice-based insurance through their platform which was very cost effective in comparison to other players who take lump sum amount for providing trade credit insurance.”

Vaibhav successfully covered his invoices by accessing the Vesl platform and was matched to a lender who would finance his receivables. Not only did Vaibhav have peace of mind dealing with a buyer asking for payment terms, he also found new lending partners who can grow his credit limits. Now Vaibhav banks with one of the biggest Indian Commercial Banks at a lower cost of funds, thanks to trade credit insurance.

Don’t be Complacent, You’re Limitless!

Green Mint as a Company started with copper scrap, and later moved to nickel and steel. Nowadays they are processing and selling ingots. They have expanded and are currently headquartered in Singapore with networks in UAE, Hongkong, China and Africa.

Vaibhav is not stopping with one venture. “In coming years, Green Mint shall be in manufacturing and retail of goods. We are aggressively working in agro retail space.”

Stop Reading Success Stories

According to Vaibhav, to have an edge in starting a business, it is a requirement to have a niche, be focused and have deep knowledge of an industry to know where you can add value.

“There are already big players who have been there longer than you, have integrated far wider than you, and they won’t allow you to eat their share“, Vaibhav said.

“Before jumping into entrepreneurship, keep in mind that the struggle is real. Don’t read success stories. Go to people who failed and learn from them.” He added.

Posted in Features Tagged , , , , , , ,

3 Ways to Manage Cash Flow Like a Pro

Cash flow is the money that comes in and out of your business. Cash comes in when your clients pay for the goods and services that you provide. Cash goes out when you pay for your supplies, salaries, rent, etc. It is of course ideal to keep your cash flow positive where more cash comes in than goes out.

When does cash flow management become a problem? Cash flow management can become a little bit tricky when you start growing as a company and you start giving your customers better payment terms. This is when your business records sales before it receives a customer’s payment.

So let’s get to it. 3 Ways to Maximize Cashflow like a Pro, as promised.

1. Collect, collect, collect!

  • Start with a properly written contract. State clearly when you expect payment from your buyer. Make sure that your buyers understand when they’re supposed to pay invoices issued to them. Try to offer discounts for early payment and penalties for late payment.

  • Set credit limits with your buyers. A credit limit is the maximum outstanding amount of sales your business allows for a buyer. (Example, you’re not selling more of your products to a buyer because they haven’t paid their last invoice of Php500,000 yet. This means your credit limit for this buyer is set at Php500,000.)

    Don’t be afraid to deny or lower the credit limit to customers who pay late. If historically a buyer pays on time, you can also be more generous with them. What if it’s a new buyer? One way to check if they deserve higher limits is by analysing their financial statements. You can also purchase a credit report from an agency, or check with a trade credit insurer.

  • Have a strong collection team. Call your buyer when payment is due. Don’t be afraid to ask for payment. This only shows buyers that you have a system and they will form a habit around it. Remember, their payment is the most important part of a sale.

2. Stretch your own expenses!

  • The biggest expense other than salaries is paying for supply. Hence, make sure you choose your suppliers wisely. Do they provide early payment discounts? Are they providing you payment terms? Negotiate longer payment terms with suppliers who you’ve had the longest relationship with. If your suppliers’ payment terms are not competitive, look for new suppliers.

3. Secure your sources of working capital.

  • One of the easiest ways to improve cash flow is to have your receivables financed by a lender. Stop waiting to get paid after 60, 90 120 days. Free your cash from being trapped in receivables by approaching lenders who can take over the waiting period for payment. Lenders will charge for interest payment, but the cost can often be offset by taking advantage of supplier discounts for your early payments. Another way is by passing on the cost of financing to your customers.

  • It is crucial to secure a receivable financing line as early as possible. Don’t wait until you are in a cash flow crunch to secure additional sources of liquid cash. Don’t be complacent, it sometimes takes time for lenders to provide you with a receivable financing line. Some lines wouldn’t be enough, providing you only credit up to 50% of your invoices. They might request for you to purchase trade credit insurance, so they feel more comfortable with your receivables. But often, when you have trade credit insurance, they are willing to extend your credit line higher or lower your interest rates because by virtue of the insurance, buyer’s default risk is mitigated.

Take control of your cash flow now. As prescribed above, there are ways to make certain that your cash outflows do not overshadow your cash inflows. Now go, don’t be afraid to grow. But don’t let your growth kill you.

Disclaimer: The views and opinions expressed by the author does not necessarily reflect the official policy or position of Vesl Pte Ltd. Should you wish to contact the author of the blog, you may do so by contacting her here.

Posted in Risk Management Tagged , , , , , , , , ,
Open chat
1
Hi! How can we help you? For more information, you can visit our Support page.
Powered by