The SMB alternative lending space has evolved in the U.S. in large part to help accelerate small businesses’ access to cash. Whether merchant cash advances or other online products, these tools position themselves as a faster means to boost cash flow than cumbersome bank applications that may face a stamp of rejection anyway.
When a small business needs quick access to capital to not only grow, but to grow internationally, however, some alternative lending options on the market are inadequate, says A.J. Krzyzanowski, assistant vice president of international trade finance at Franklin Capital Network. The issue, he recently told PYMNTS, is that small businesses don't simply need cash to operate across borders.
“What we’ve been seeing over the last year in the factoring world is merchant cash advances, which are quick, but there are not a lot of service providers,” he said. “The international world, for a small business, can be a little bit challenging and uncertain for them because they may or may not have experience.”
Indeed, HSBC research released last year found that the biggest hurdle small businesses face in stepping onto the global stage is the lack of international business experience, with the majority of small business exporters surveyed by HSBC admitting their understanding of various geographic markets is limited. Regulations, too, are a challenge, while exporters also face the risk of working with unfamiliar trading partners and corporate customers. Threats from those unknown buyers can range from the risk of non-payment on an invoice to the risk of falling out of compliance with KYC or AML rules.
Businesses not only need working capital to finance international expansion, but they need the types of services like collections, AR management and due diligence coupled with financing, Krzyzanowski said. But, he added, the market today doesn’t have many options for small businesses.
For instance, the U.S. Export-Import Bank’s reach is limited, the executive noted.
“The EXIM Bank does have programs, but they’re highly regulated regarding who can and cannot actually access those services,” he said.“There is a physical checklist the company has to take, so a lot of smaller businesses may not have access to those funds.”
Then there is trade credit insurance, a way for businesses to insure against the risk of non-payment when working with an overseas buyer.
“Alternatively,” he continued, “SMEs can get an insurance policy. But the downside to those types of policies is that you are insuring your foreign receivables but not receiving any financing. If something does happen, you can fall back on that policy, but in our experience it’s generally more difficult than it sounds – insurance companies don’t want to pay out on every claim that’s filed.”
What ends up happening, Krzyzanowski said, is a lot of missed opportunities for small businesses. Unfortunately, the larger the purchase order, the more risk is involved that a small business may fulfill an order and never get paid.
“Small businesses may have gotten opportunities here and there [to expand internationally], and they may do it, knowing the risk is relatively small in a smaller purchase order,” he explained. “But when they receive a larger purchase order, they may not want to actually go after that opportunity.”
Earlier this month Franklin Capital Network rolled out Franklin Export Funding, a financing solution for small exporters in need of financing on international expansion, as well as additional services like AR management and due diligence. Krzyzanowski said the company hopes the solution will help small businesses grow so much that they eventually outgrow Franklin's services.
For some small businesses that have already been presented with the opportunity for international expansion, the executive said the Export Funding tool is well-received. But for others, apprehension persists.
“A lot of small businesses are very apprehensive about entering new markets, especially internationally, because they don’t have the expertise to go after it, or it’s not something they may have thought about,” he said. “For a lot of smaller businesses, they may not want to take the time and effort to move into that market.”
Krzyzanowski added that dismissing an opportunity for international expansion could be a big mistake. Not only are small businesses missing out on large purchase orders from international customers when they fail to grow globally, but they are also turning down an opportunity to have a huge competitive advantage.
“Essentially, these small businesses could be the only player in that space or that region that is procuring and producing and fulfilling orders for international companies,” he said. “There is a larger competitive advantage, especially for smaller businesses, that can really take effect – there may not be that much competition in these other markets.”