Credit Management December 2022

OPINION
AUTHOR – Andrew Birkwood
❝
Even small shifts in contract terms could derail the current
business model and put stress on meeting the interest payments
on the SME lending they have.
understand the historic performance of the
assets we are buying in order to support a
sensible price.
The contractual element of the debt sale
process can also be quite time consuming,
though not in itself a barrier to progress.
When a routine has become established,
there is no reason why a transaction cannot
occur within a couple of months from NDA
through to completion.
Future prospects
In recent months I’ve spoken to a handful of
our business lending clients, mostly in the
non-bank sector, to gauge their impression
of the future environment and how they’re
viewing lending in the current economic
position we find ourselves in.
An interesting message, which probably
isn’t surprising, is that it’s a very benign
environment from a lending standpoint.
And we would echo that from a debt buying
perspective. We’re not seeing significant
increases in failed payment plans or a
slowdown of settlements. It’s the same on
the lending side of things. They’re not, as
yet, seeing significant defaults coming
through to their business.
What they are seeing, however, is
depleted cash reserves in the customers
(business and personal) balance sheets.
Cash reserves are still probably, within the
SMEs, above pre-pandemic levels, but they
are certainly on the way down and being
reduced month on month, which is clearly
a risk factor that’s being considered.
The key measure, being looked at by a
number of the lenders, unsurprisingly, is
the confidence ratings and the confidence
indices. It won’t surprise anybody reading
this article to learn that the SME confidence
levels are plummeting. And as we go from
quarter to quarter this year, they have
started to noticeably fall off a cliff.
Some lenders have reported that they
have been tightening their lending criteria
and have reinforced their scorecards, and
thus they are tightening their belts and not
expecting to lend as much in the next six- to
12-months. Interestingly, other lenders see
this as an opportunity. There are a few nonbank
lenders that have recently secured
financing and see this as an opportunity
to grow their books and are seeing the
next 12 months as a time that they can
double (or even more than double) their
current lending.
Part of that might be that they expect
retail banks to step away and tighten up
their own credit score cards, which will
create something of a void in the more
prime SME type customers who may find
themselves not being backed by the retail
banks, allowing the non-bank players to
potentially move into their space.
Mixed messages
Lenders are seeing greater bias towards
higher balances over the last year, and this
is something we’ve seen in the debt sale
side as well in terms of the purchases we’ve
been making – namely that balances are
starting to creep up. Partly that’s to do with
– as the merchant cash advance companies
report – the post-COVID environment,
where nobody uses cash anymore and
everybody pays with their card, and partly,
it’s to do with inflation. So, it’s very much
a mixed message from the non-bank
lender community.
What is less mixed and more constant is
the message that lenders are taking more
time to communicate with and understand
their customer base, to proactively determine
their financial health, and their outlook
on future trading. This can include
regular catch ups with the customer
base, or a greater use
of Open Banking information
to provide early warnings of
customer distress. Again, at
present, the situation appears
somewhat benign,
but that situation can easily
and rapidly change. Even
small shifts in contract
terms could derail the current
business model and
put stress on meeting the
interest payments on the
SME lending they have.
Adapted from a
presentation given
by Andrew Birkwood
at a webinar in
October 2022 hosted
by Vistra.com.
Andrew Birkwood is
Founder and CEO
of Azzurro Associates
Brave | Curious | Resilient / www.cicm.com / December 2022 / PAGE 27