Gearing up for growth with alternative financing solutions

Photo by John Towner

While the pandemic has presented unprecedented challenges and disruption to the global business environment, it has also opened up possibilities for companies that position themselves to seize them.

Key to weathering the disruptions and realising growth plans are strong and agile financial foundations. One way to realise this is through exploring alternative funding solutions.

SMEhorizon speaks with Achint Bhagat, Director of FortuneX, a Hong Kong based apparel sourcing company, on his company’s journey through the pandemic and their plans for future growth. Morgan Terigi, CEO and Co-founder of Incomlend, also weighs in on how his company’s alternative working capital solutions has strengthened FortuneX’s financial position, and how alternative funding solutions address SMEs’ key challenges and financial barriers and position them for growth.

A shift in the tides

FortuneX is a a 20-year-old Hong Kong-based apparel sourcing company with operations and two garment manufacturing factories in Bangladesh. “We source garments from more than 30 factories in the market, and our customers are mainly retailers and apparel trading companies in India and the USA,” explains Achint.

“Before the pandemic, we had a strong business pipeline and an excellent position to sustain our growth. We saw solid demands for apparel worldwide due to trends such as the rise of e-commerce, urbanisation and increased disposable income.”

While future prospects seemed bright before COVID-19, the shadow thrown by the global pandemic has meant new challenges that had to be overcome. 

“The closure of brick-and-mortar retail stores and the drop in apparel sales during the pandemic has had significant repercussions across the entire garment supply chain,” he explains.

“Some of our customers, who are apparel trading companies, experienced several cancelled orders during this period that impacted their cash flow. Ultimately, it led to late payment for our receivables and raised the debtor credit risk for us.”

“According to research by trade credit insurer Atradius, late payments in the textile industry in Asia impacted 64% of the total value of B2B invoices. Late payments and credit risk can affect our ability to finance our next production cycle and lead to more revenue losses.”

Morgan echoes his sentiments, noting that for SMEs suffering from the long-term impacts of COVID-19 and the recurring clampdowns to curb infections globally, the critical challenges include “cancelled orders, a drastic drop in demand for their products, greater credit risk and restricted cash flow.”

“They also face greater market volatility and ambiguity in supply-and-demand trends, making it harder to plan for the future,” he adds.

Seeking the means of survival

Companies seeking financial support to weather the storms of the pandemic often find their avenues limited. This is particularly true for SMEs. Morgan explains that many SMEs often get caught in a cycle where they cannot get the finance they require from larger, traditional banks. “The main reason this happens is that SMEs sometimes struggle to prove creditworthiness. As many SMEs were placed in weakened financial situations last year due to the ongoing crisis, they might get lesser support from the banks and left unfinanced.”

“Traditionally, banks tend to extend the onboarding process for SMEs, which result in a slower turnaround time. Consequently, some SMEs wind up self-financing, which further limits their ability to grow their business.

In these situations, alternative funding solutions can help, a recourse assessed by many SMEs, in Morgan’s experience. “By reducing their reliance on banks and diversifying their access to funding, SMEs are future-proofing their business from any economic impact such as the current pandemic.

“Alternative financing solutions can help SMEs liberate their working capital and recover their financial health. These are the foundational elements for SMEs to develop more resilient business operations and have the fiscal agility to seize growth opportunities amid global economic challenges.

“With faster access to working capital, SMEs can cover their operational expense and execute planning with greater confidence and certainty. The improved cash flow will also allow them to finance their next production cycle and ramp up their output when the demand for their products increases.”

Such solutions have been a lifeline for FortuneX, which has leveraged Incomlend’s Invoicing Finance Programme. Through this, they are able to cash in an invoice quickly following shipment, insulting them from credit risks and safeguards our financial health, especially vital as the retail space and demand for garments remain volatile due to the pandemic.

Beyond the financial rewards, such alternative solutions also help maintain business relationships, inevitably under strain in the difficult climate. “The alternative working capital solution allows us to retain our customers by offering more competitive payment terms,” explains Achint.

“Our usual payment terms range from 30 to 60 days post the delivery of our receivables. Now, our customers now have the option of paying for the shipment’s invoice value up to 120 days later, alleviating the stress our key customers are facing concerning cash flow and strengthening our partnership.”

Elaborating on this programme, Morgan notes that these can keep the debt-to-equity ratio low and preserve SMEs’ borrowing capacity, allowing them to spread their funding sources further.

“With invoice financing, SMEs are effectively selling their invoice and obtaining finance without risk,” he explains. 

“SMEs, specifically exporters, can fund their export invoices by selling them at a discount rate in return for receiving early cash for their receivables.

“Besides liberating working capital, invoice factoring can also insulate SMEs from debtor credit risk, especially for SMEs in the Asia Pacific. There are about 73% of companies which have endured different levels of unpaid receivables. Additionally, 82% of them suffered from delayed payments over the past three years.”

Looking towards clearer skies

As the pandemic continues, finding new ways of building financial resiliency will be necessary. Says Morgan “Although governments worldwide rolled out policies and programmes, such as wage support, to help cushion the impact of the pandemic on SMEs, these measures will start to dwindle over time.”

“SMEs need to find ways to build financial resiliency. The banks will still be pursuing the same path they have been walking for the last few years, reducing their trade finance exposure. Whether it is fintech or other alternative funding sources, the demand among SMEs will only continue to grow stronger.“

For FortuneX, shares Achint, other alternative funding solutions they are looking into include off-balance-sheet financing options, which can provide them with the capital needed to place themselves in a better growth position when the economy recovers without the heavy burden of a loan.

“Additionally, by diversifying our access to funding, we are laying a financial foundation that is more resistant to future disruption,” he added.

“Our customers in the USA are already seeing retailers reinstating cancelled orders and placing new ones. With improved access to quick turnaround working capital, we can swiftly act on new orders or even increase our output to meet seasonal demands that allow us to capture new revenue streams and grow our business.”

Taking a broader look at the apparel industry in the aftermath of the pandemic, Achint predicts that for buyers, risks will potentially become a vital factor when deciding on sourcing destinations and evaluating suppliers.

“Buyers will emphasise manufacturers’ production capabilities and efficiencies to mitigate risk and ensure a more reliable supply chain.”

He also foresees a possible acceleration in the industry’s technology adoption, leading to faster and more efficient production across the industry. “Manufacturers will look for opportunities to advance their digitalisation plans to respond better to rapidly evolving consumer demands. Those who succeed will have a substantial competitive advantage over their peers.”

“However, some manufacturers, especially SMEs, might not invest in technology in the near term due to the pandemic’s economic uncertainty and financial pressure.

“Again, this highlights the importance of having access to working capital and funds to pursue investments and opportunities to make a meaningful impact on their business,” he concludes.