The recession is drowning SMEs and credit is not enough to keep them afloat: how they are financed

The crisis in the sector

Alejandro Bartalinimetallurgical businessman, addresses in conversation with this media the difficulty that SMEs face in obtaining financingnot only because of interest rates, which, although lower than last year, are still high, but also because of the low economic activity in many sectors.

“Although some energy-related sectors continue to grow, the rest of the industries are experiencing a significant drop in sales, which makes it even more difficult to make decisions on new credits for investments,” he analyses.

For the entrepreneur, the current financing opportunities They are only viable in sectors of the economy where production remains active.. On the other hand, those sectors of the domestic market that saw a fall of between 20 and 30% In their activity they have no incentive to make short-term investments. “Therefore, The decision to take out financing is becoming more and more complicated for the SMEs in these contexts of low demand,” he says.

Cost reduction, the only possible financing in this context?

Marco Melonia textile entrepreneur, denounces the critical situation that many SMEs are going through in a context of economic stagnation and high inflation. He assures that, after the sharp drop in activity, some industries began to operate at between 40 and 50% of their capacity, a trend that is already “almost natural” over the past eight months. In order to deal with the crisis, companies have resorted to various adjustment measures.

Meloni indicates, for example, that Many implemented a reduction in hours so they eliminated overtime and reduced work shifts. An example of this is the agreement with unions to work only 15 days a month, which implies operating at between 50 and 60% of installed capacity.

However, he argues that despite these efforts, Fixed costs continue to riseespecially those related to services such as water, gas, electricity and logistics, where the increases exceed the 400%well above the increase in the price of the goods produced.

“As a complementary measure, some SMEs resorted to obtaining financing from the State through tax arrears. However, this limits access to additional financing and deteriorates the working capital accumulated in previous years,” says the businessman. As these cost-cutting and layoff strategies—first voluntary and then forced—when resources run out, companies are turning to bank borrowing, “a dangerous option, especially in such an unstable economic environment,” he says.

In this cycle of deterioration, SMEs consume their capital reserves, whether in inputs or saved dollars, until they reach the point where Lack of financing and working capital prevents them from continuing to operate. “The consequence is the Massive business closuresa phenomenon that is already being seen with the closure of 10,000 SMEs,” warns Meloni.

SME investments: what instruments are available?

SMEs, as always, have traditional financing instruments, such as check discounting, the stock market through the sale of Reciprocal Guarantee Certificates (CGRs), and specific credits. Some of these loans have subsidized rates, especially those intended for new investments, which implies interest rates below inflation. However, these favorable conditions They are only available at some state and private banks.

Alejandro Granadogeneral manager of FIDaval, the Mutual Guarantee Society (SGR) of the ST Group, describes the change in financing policies for SMEs following the arrival of the current government and details its impact on the relationship between banks and the private sector and, in particular, on small and medium-sized enterprises (SMEs).

Granado indicates that, until the end of 2023, The banks were focused on financing the Statewhich was the largest borrower. With a few exceptions, such as the Productive Investment Lines (LIP), SMEs were financed more through the capital market than through financial institutions.

However, with the new government, policies were implemented to reduce the monetary liabilities of the State and the Central Bank (BCRA), which forced banks to reorient themselves towards the private sector, and look towards SMEs. In this new scenario, SMEs began to receive more financing offers from banks. SGRs played a key role in mitigating credit risk, Granado says.

It indicates that SMEs began to take out credit with three main objectives:

• working capital: With interest rates falling (down by more than 800 basis points), SMEs are refinancing old loans and taking out new loans at lower rates (Badlar in the private sector was 38% as of September 2024, compared to rates that reached 130% at the end of 2023).
• discounting of documents: Banks offer rates lower than the monetary policy rate for discounting documents such as checks.
• acquisition of capital goods and investment: Banks offer long-term loans (up to 72 months with 12 months grace period) with rates between 29% and 33% nominal annual interest rate (APR), although they often require the guarantee of an SGR.

Finally, Granado mentions that Financing through the capital market decreased because the conditions offered by financial institutions are more attractive.

Negotiable bonds and check rates: SME financing alternatives

Meanwhile, Leandro Villalbaportfolio manager at Argenfunds, suggests in statements to this medium that there is also a broad appetite on the part of SMEs to make placements of Dollar Linked Bondswhich are indexed in line with the variation of the official exchange rate plus a spread.

“This spread, in the guaranteed segment, is currently around 6% or 7%. and may vary depending on the maturity period or credit risk of the company,” he says.

Given the low expectation of devaluation in the short term assigned by the market, even with the spread mentioned above, these financing rates are convenient for SMEs and “It is even more attractive for SMEs that are engaged in foreign trade and can fit their financing structure“, says Villalba.

Also very attractive are the Check discount rates through SGRswhose nominal annual rates are between 39% and 40% for 30- or 60-day checks, yields very similar to those of the National Treasury capitalization bills (Lecaps) and which allow obtaining financing below the monthly inflation.

For the strategist, it is relevant to mention that for some months now The appetite of mutual funds (FCI) for fixed-rate instruments began to grow as a result of the sharp drop in inflation observed in recent months. Consequently, for larger SMEs that are in the guaranteed segment, they can find convenient financing through bond issues. ONs adjusted by Badlar rate or even with the negotiation of electronic invoices.

Finally, if the downward trend in inflation continues and expectations normalize, Villalba expects that an extension of financing terms both for check discounting, where today the largest volume is found in terms of up to 120 days, and for fixed-rate debt placements, and it allows for improved predictability and medium-term options for companies.