Fallout of the coronavirus: what to prepare for as an SME

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2 March 2020

ryesterhu

Coronavirus is now global as is its impact on financial markets and trade. The effects have been felt particularly in China and, significantly for SMEs, on manufacturing volumes. Trade finance can play an important role for companies looking to deal with the impact of the virus on their stock levels.

A
fter first being reported with just one case on 31st December 2019 in Wuhan, China, coronavirus (Covid-19) has now taken the lives of nearly 3,000 people globally. What seemed to be an epidemic contained in the far-east has now spread to 58 countries.

This has caused serious disruption to financial markets and global trade. The CBOE volatility index (VIX) has seen its sharpest rise since Lehman Brothers collapsed in 2008. Equity markets all over the world are tumbling. The S&P 500 has dropped nearly 8% in the last 10 days. The FTSE 100 has dropped just under 8.5% from this time last week and DAX 30 has even worse losses. Even commodities, which usually provide a safe haven from such global market events as this, are down. The Bloomberg commodity index has seen a downward spiral of 6% just this week.

Chinese production volumes continue to be affected

Here at Ebury we are seeing the effects of coronavirus in the activity of our clients and our clients’ suppliers. SMEs in the UK importing from China are struggling to get the stock they need to service their customers. Similarly, UK based companies exporting to China have generally halted their activity either due to lack of demand or fear of not being paid. Hundreds of European companies with operations in China say the coronavirus outbreak is forcing them to lower annual business targets.

Chinese factories making edible oils and animal feed have restored output to pre-virus levels in an early sign of China’s efforts to get its economy running normally again. Central and local governments are loosening the criteria for factories to resume operations, so the country can continue to meet its lofty goals for growth and economic development in 2020.

However, most Chinese factories are struggling to get back online. Factories that make the world’s smartphones, toys and other goods are finding it hard to reopen. Even with the ruling Communist Party’s help, companies say it may be months before production is back to normal.

What to expect as things start to return to normal

Companies are working overtime and commercial banks providing short term liquidity to inject some life into the SME sector. As it stands though, no more than 50% production is back on track. The aforementioned turnaround in China would indicate that we are over the worst of it. As the global trade environment begins to stabilise you can expect a number of things:

1. There will be a global shortage of stock that needs to be replenished
2. Exporters in China are going to be short on cash after paying various operating expenses without capturing revenue from orders
3. Chinese importers will have a huge backlog of orders waiting for their UK suppliers. Expect an explosion in activity
4. Bridges will need to be re-built between the Chinese and British corporations after a prolonged period of non-trading due to Chinese new year and coronavirus.

Trade finance can provide additional working capital

All of these developments point towards one truth…cash is king. In this situation, having some kind of working capital facility to draw down on is going to offer a significant advantage. Warehouses can be restocked without tying up capital and significantly reducing the risk of over-trading. Chinese suppliers can be paid upfront and those that do could expect an early settlement discount.

These sort of deals can be arranged by the native Chinese speaking staff at Ebury who can negotiate on our client’s behalf to secure the absolute best price. With a Trade Finance facility in place you won’t miss an opportunity just simply due to not having the cash to finance it.

Ebury can provide the working capital that SMEs need without requiring any security or any upfront fees. Pay for what you use, when you use it and get your relationship with your Chinese counterparts back on track.