The necessity in SME - and any - financing is servicing the loans; collecting money from the borrowers and thereby adding value to the collateral and to the investor. As experts in loan servicing, we see some common challenges in this process.
SME Direct Debt Funds and Non-Bank Lenders often do not have the capability, the systems or the desire to service the loans that they originate or invest in. Overall, we're seeing increased support for SME financing from local and regional Government bodies, a decreasing supply of traditional bank finance for SMEs, and the demand for Alternative Finance on the rise. The SME lending space is also undergoing a tech-led transformation through blossoming Fintech platforms.
The main sources of finance in the small and medium-sized enterprise (SME) loan market in the Netherlands continues to be through banks. However, over the last 5 years, banks have reduced their funding to SMEs by €75 billion according to the EBA.
In fact, according to the OECD, in 2016 only 21% of
SMEs in the Netherlands even applied for a bank loan and 76% of
them received the loan. That translates to 16% of SMEs getting bank
funding. More importantly, the number of SMEs grew by 3.5% between
2016 and 2017 while during that time, funding was reduced by
€3 billion (from €18.24 billion in 2015 to €15.24
billion in 2016).
Of course, the necessity in SME - and any - financing is servicing the loans; collecting money from the borrowers and thereby adding value to the collateral and to the investor. Monitoring of covenant and any breaches is also a critical role of the loan servicer. As experts in loan servicing, we see five common challenges in this process:
1. The SEPA direct debit
Setting up a SEPA (Standard European Payment Authorisation) direct debit authorisation in Europe can be a challenge due to the strict submission format of the banks. This typically differs slightly between banks, and errors as small as leaving an extra space in the information provided, can cause the authorisation to fail.
2. Monitoring early warning signs
Monitoring and looking for early warning signs of issues affecting your borrowers, such as changes in their financial situation and the timeliness of their payments, is important. We provide tools for lenders to facilitate this. If a borrower is late paying, you need to get in contact with them and in order to chase up late payments effectively, this process needs to be automated. No one has endless human resources, so chasing up 200 or 500 loans becomes very difficult, very fast.
3. Chasing late payments
Chasing late payments can take months, especially since you're often dealing with a quarterly payment cycle. You might not know, for example, that the SEPA debit set up is not going to work. There are proactive things you can do to double check the authorisation, like run a one-cent test, but even then it's not 100% certain. The authorised amount may be incorrect, or the borrower may not have enough funds and so on. If the borrower is a private person, it is possible for them to reverse the SEPA, but if the borrower is company, the authorisation typically cannot be reversed.
4. Managing the impact on the lender
The lender of course has investors, and is under a lot of pressure to collect all funds due. It's usually the lender who analyses the risk of the portfolio, so it's very much in their interest to ensure the funds are being collected, and that the value and the portfolio is commensurate with what they have effectively sold their investors/funders on.
Waivers and amendments are also important. They tend to be relatively low in volume in developed markets and higher volume in emerging markets as borrowers do not understand their covenant obligations fully and regularly breach them - hence the need for breaches to covenants to be first waived and then amended to ensure breaches do not continue or come back. This is especially true for smaller SME loans where cash flow can fluctuate significantly.
The lender needs to make sure they have correctly priced the loans in the portfolio against the underlying risk. And part of that risk is servicing the loans. If they're not serviced properly, the value of the portfolio can be severely negatively impacted.
5. Adhering to local requirements
Every jurisdiction in Europe has slightly different requirements when it comes to what you need to do as a loan servicer and indeed, who can be one. The UK has a SEPA equivalent but the authorisation requirements differ. And of course GDPR has an impact, as loan servicers are dealing with personal data. You need to make sure you have all the necessary disclosures and that your contracts are adapted accordingly.
Talk to us
TMF Group's experts can service bilateral loans and provide administration services for club and syndicated deals. We can represent either a group of lenders on a single loan through our Loan Agency services, or direct lenders with a portfolio of loans through our Loan Servicing proposition.
Need more information? Contact us today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.