Liquidity during the economic crisis. With factoring and leasing.
The COVID-19 pandemic has triggered an economic crisis in Switzerland that poses challenges for many companies – for example in terms of liquidity. How Swiss SMEs can create new liquid assets through factoring and leasing, allowing them to emerge stronger from the crisis.
Factoring and leasing as financing alternatives
"Swiss SMEs must prepare for the post-crisis period by making new investments now," says Eric Balmer, Head of Financing Solutions at Credit Suisse, at the third Entrepreneur Conference in 2020. But how can they do this? After all, many companies have experienced major financial difficulties as a result of the lockdown in spring and are facing a shortage of liquidity.
Despite the difficult conditions, Eric Balmer says that it is possible for small and medium-sized enterprises in Switzerland to create new liquidity – by relying on a diversified mix of financing. The finance expert refers to two financing models in particular: leasing and factoring.
Leasing and factoring
An overview of the benefits of leasing and factoring.
Leasing helps to dynamically finance investments in property, plant, and equipment. The benefits are as follows:
- Congruent financing over the economic life of the assets.
- Planning certainty through fixed lease payments during the entire term.
- Existing facilities can be sold and continue to be used by means of the "sale and lease back" option.
- Additional financing potential can be created and debt capacity will be expanded.
Factoring enables a company to sell receivables to the bank and thus create new liquidity directly. The benefits are as follows:
- Liquidity is ensured by bridging long payment periods for own accounts receivable.
- Additional business because longer terms of payment can be offered.
- The amount of financing grows in line with sales.
- Protection against debtor defaults.
No indebtedness due to leasing
Most people are familiar with leasing in connection with the purchase of a car. But companies can also benefit from this type of financing. Because the objects that can be leased are almost unlimited.
"We have already used it to finance solar plants, cranes, and even wind power plants,” says Eric Balmer. Leasing could be an ideal way to realize investments in property, plant, and equipment, as it is secured credit. A company does not need to be afraid of running into debt with this mode of financing.
Factoring helps counteract planning uncertainty
A company that has already taken out a loan and thus reached its debt capacity, for example, has the option of using factoring. This means that it can still finance growth despite the shortage of cash and other liquid assets. The Swiss Eyewear Group successfully gained experience with this modern source of financing during its growth phase. And CEO Jerry Dreifuss is impressed with its impact: "Uncertain times are very bad for business. But factoring helps to counteract this planning uncertainty."
As soon as the cash flow was strong enough, factoring was no longer needed. But that could change again, according to Jerry Dreifuss. As a service provider, the Swiss Eyewear Group was hit hard by the COVID-19 crisis. "A spring-time lockdown is not ideal when you sell sunglasses," says Jerry Dreifuss.
Looking for new opportunities in the economic crisis
Jerry Dreifuss's company looked for new opportunities to continue generating sales despite the crisis – and quickly found and implemented them. In addition to launching its own online store – invushop.com – the Swiss Eyewear Group has started to sell glasses on television in infomercials. In addition, the company now supplies high-quality safety glasses to governments, hospitals, retailers, and non-profit organizations worldwide.
The Swiss Eyewear Group now wants to build up a strong base in these new business areas. And to prevent liquidity bottlenecks during expansion, factoring in combination with other types of financing is a good option. "It is quite possible that we will reactivate factoring in cooperation with Credit Suisse," says the CEO.
Using the economic crisis for restructuring
The COVID-19 crisis offers new opportunities for a company, not only in terms of diversifying its sources of financing. SMEs can also develop in other areas. "In addition to liquidity management, companies should focus on clients and employees," says Matthias Knaur, CEO of the Annuity Management Group.
In his opinion, now is the ideal time for a company to streamline processes, drive digitalization, and adapt the organizational structure. It is also a good opportunity to hire new, promising talents. Matthias Knaur is certain: "If a company also focuses on these aspects, it will emerge from the crisis stronger and better prepared for future volatile times."