Small and medium enterprises (SMEs) are in need of better cash management services to better cope with the increasingly onerous demands of their larger business partners during times of financial crisis and increased volatility, says Neo Bock Cheng, OCBC’s head of group transaction banking.
As uncertainty continues to flow through the markets and both investors and businesses batten down the hatches one of the segments most vulnerable is SMEs.
The vulnerability of these companies stems from their lack of scale and their position in the supply chain. For example, if an Asian SME forms a part of a multinational’s supply chain, the larger corporate is far more likely to be able to dictate terms.
If an Asian SME is selling into depressed markets like the US and Europe, their customers may request, for example, an extension on their credit period and the SME may not be in a position to refuse the request.
If not managed properly, a change from 60 day terms to 90 day terms could lead to cash flow problems.
"Access to liquidity is something SMEs can't take for granted, therefore it’s very important for them to manage their cash flow," said Bock, adding that OCBC aims to make that process as easy as possible.
One possible remedy to cash flow problems stemming from extended credit periods that cash management banks provide is the ability to discount receivables to be able to unlock the cash from them earlier than the payment period would ordinarily allow.
OCBC is also recommending that SME clients manage payments more efficiently and shift to electronic payment systems rather than using cheques. The lack of control over when that cheque is cashed by the counterparty leads to cash having to remain idle in an SME’s bank account, which is not an effective way of managing cash flow.
