Accessing working capital through a marketplace. Advantages for SMEs

Being an entrepreneur in Romania is not easy at all, especially in a period like this, when the economic context characterized by uncertainty brings numerous challenges to local SMEs.

However, what ensures the success of a business, even in difficult times, is the ability to find opportunities, to manage commercial operations as best as possible and minimize financial risks.

Your experience as an entrepreneur or manager has probably already shown you how important it is to react with agility to changes in relevant markets to support the development of your business through increasing sales, profitability, and liquidity.

Working capital – an essential indicator in your business

A first condition to maintain the competitiveness of your company’s product and service offerings in a market where consumer purchasing power is declining is its ability to honor its short-term financial obligations. 

Working capital (sometimes referred to as the current account) is the financial indicator that measures this capacity. Practically, it refers to the difference between the resources available in the business within an operational cycle (such as receivables, stocks, account and cash funds) and the company’s current liabilities. You can also calculate it as a ratio (current assets/current liabilities), in which case you should aim for it to be over-unity (between 1.2 and 2) for the short-term efficiency and financial health of your company.

Why is working capital important?

You probably also take care of monthly payments to employees, suppliers, or public budgets so that salaries, bills, taxes and duties are covered on time, regardless of how short-term they are.

A sufficient working capital will allow you to do this, while also monitoring profitability growth over time. This way, you can keep your staff involved, maintain satisfied business partners and reduce risks in your relationship with tax authorities.

How can you ensure the needed working capital?

There are, of course, a multitude of solutions that you can use to obtain the funds your business needs to pay its current financial obligations.

For example, if you are a diligent administrator, you have probably already tried to negotiate the payment terms with suppliers and customers. While it would be ideal to obtain more generous commercial credits from suppliers compared to what you grant customers, this will not always be possible, often due to objective reasons (example: contract policies, business specifics, the need to retain customers, etc.).

However, there is a financial tool that allows you to quickly transform invoices issued to customers into funds that are immediately available, regardless of the payment due date, as long as they are under a due date: factoring.

About Factoring and how to access it

Factoring involves a commercial credit agreement in which a specialized entity in financing issued invoices with payment terms, known as a factor (bank or NBFI), and a commercial company (a supplier of goods and services with payment terms) interested in securing working capital – such as your company – known as an adherent, participate.

Until recently, on the Romanian market, factoring was only available as a product to legal entities in the individual offer of commercial banks and some NBFI.

As a result, to obtain an acceptable factoring offer, an entrepreneur or business administrator had to make multiple trips to the branches of financial institutions until they identified the right offer for their needs. The financing had to be accessible in time to fulfill its outstanding obligations.

Limitations of traditional factoring

As you can imagine, such efforts often used to take an extremely long time from entrepreneurs, both from the perspective of the effort to travel to bank branches, as well as due to the human resources involved in preparing and analyzing, respectively, the approval of applications.

Furthermore, the final contracted offer was not necessarily the most advantageous among the offers available at that time on the market. Often, interest and commission costs were not optimized due to the lack of transparency, flexibility and time constraints.

The usefulness of the existence of a marketplace for working capital financing

Taking into account these challenges faced by entrepreneurs in traditional financing, there was a need to democratize access to working capital financing for SMEs.

Thus, there was a need for an online marketplace where they could finance, with minimum effort, their claims arising from invoices issued to clients, at an optimized cost with interest and factoring fees. 

What distinguishes the marketplace from the traditional factoring offer?

First of all, the marketplace brings online, in one place, more investors, facilitating access to their offers without the need for individual travel to their branches. 

Thus, more banks, NBFI and private investors can bid for the invoices loaded by SMEs for financing purposes. Through the auction mechanism, the SME can choose the most advantageous offer in terms of financing costs. 

This is especially relevant given that, currently, interest costs are going through a period of significant increases, becoming increasingly inaccessible to SMEs. 

In conclusion, the online platform eliminates time constraints and increases transparency, offering SMEs the opportunity to focus on their core business.