The Death Blow and a Lifeline for SMEs

By Prof. Enrique Soriano 

Since March 15, we have been under strict lockdown rules (ECQ) declared by the government to mitigate the spread of Covid-19. The speed at which the virus has spread is like nothing we have seen and experienced in our lifetimes. While the country faithfully complied with and observed the ECQ by staying home, many contractual obligations were still running, including payment of salaries, rental of spaces and offices, commitments to deliver goods and services, construction contracts, project engagements, booking of events in hotels for which deposits have been paid, payments for equipment and debt servicing. The 75-day temporary work closure has spelled doom for most businesses and the workforce. According to the Department of Labor and Employment (DOLE), an estimated 3 M to 5 M workers will lose their jobs this year.

 

Hard hit industries 

The retail industry, with food and beverage in particular is among the sectors badly affected after tourism (hospitality and travel). “With practically no sales during the lockdown, our income has dried up and we are no longer  in a position to pay employee salaries, which account for 20 percent of operating costs,” said one distraught founder of a business with presence in major malls. “Then, we have to contend with our loans and rent.”

Industry leaders from organizations like the Philippine Chamber of Commerce and Industry (PCCI), Association of Filipino Franchisors Inc. (AFFI), Philippine Retailers Association (PRA) and the Philippine Franchise Association (PFA) have expressed fears of the deepening impact on many of their businesses. Collectively, they are reeling under severe financial stress and are in urgent need of funding to ensure business survival and continuity. As owners experience steep decline in sales, payables continue regardless of whether they can recover and regain full operations. Businesses need to be sure of their daily and weekly cash flows – planning for every single payment to a supplier and to be firm with their own debtors so they know when they’ll receive cash from their customers. So when lenders call out business owners to remind them of their debt obligation, stress kicks in and the pressure builds.

 

And more pressure 

As businesses order stocks to fulfill demand from their customers, suppliers demand cash on delivery as relationships have already reached breaking point (suppliers are being ignored and not being paid well beyond any previously agreed terms). In this tense situation where suppliers are given a run-around, they would be left with no other choice but to tighten the noose and refuse to extend additional credit. Under pressure, suppliers and creditors will have to turn to harsher methods of debt recovery, taking legal action against these affected SMEs, their lifelong customers. When cash flow is compromised, business owners become desperate. The longer this pandemic lasts, the larger the cash gap drain will be. Using internal funds to recapitalize the business will not be enough. Owners have to arrange working capital extensions with banks and finance companies to tide them over in the next six months. In the absence of funding that offers reasonable terms, owners will end up at the mercy of loan sharks. With an inordinately high interest rate, poor sales and burning operating expenses, it will be the death blow for most businesses.

This disruptive and unprecedented crisis requires unprecedented support and intervention from the government. It is time for the country to enact a Covid-19 lifeline law that will provide for quick measures to support businesses, especially the SMEs that have been adversely impacted by the crisis.

The next article will focus on urgent recommendations on what the SME Lifeline Law should contain…