Soriano: The real Covid lifeline for SMEs

Enrique Soriano

LIFE must come first over livelihood. Absolutely true. But for small and medium enterprises (SMEs) on the brink of closure, we refer to most of them as the “living dead” or zombie companies. Earning just enough money to continue operating but unable to pay off debt, zombie companies have no excess capital to grow. They are usually subject to higher borrowing costs and may be one disruption away from insolvency. Then the coronavirus struck followed by the lockdown, and suddenly their world turned upside down. And just like any shocked entity, they suddenly needed financial life support. “Cash is king” has never been more true. With so many challenges happening all at the same time, how can business owners continue operating when there is no more demand for their products and services?

In my more than a decade of doing turnaround advisory and receivership work, I have found out that SMEs are heavily dependent on sales or operating revenue and expectedly have fewer sources for working capital compared to large companies. Out of the usual proceeds of their weekly or monthly sales, owners would usually allocate the money to pay their lessors, employees, suppliers and creditors. With the pandemic unfolding, most SMEs are really in a very deep hole. And the next two quarters are likely to be the most difficult and toughest period most business owners will ever experience in their lifetimes. Some of them can do little but pray that things return to normal before they careen off a financial cliff. We need to rally them so they will persevere and not give up.The lockdown and the spate of restrictions have made the already bad and tense situation worse.

W+B’s internal research arm initiated a polling of more than 200 SMEs and as expected most of them are grappling with tremendous uncertainty about their future. In the survey, it predicted that in July, more than 30 percent will not be able to survive, despite the support measures announced by the government. If the general community quarantine lasts another month or more, the situation will look even more bleak, and based on the study, 60 percent will end up closing down their businesses by August.

The study forewarns an explosion in bankruptcies in the final three months of this year when government support does not reach the intended beneficiaries. The collective views of these owners clearly highlight that unless a substantive stimulus package or an economic lifeline is offered by the government immediately, the multiple blows hitting businesses will result in a permanent impairment of more than half of the estimated one million SMEs in the country.

The message is clear... any government that fails to provide a lifeline to this critical sector can mean a death knell for the country’s economy. The stakes could not be higher: These SME employers account for 99.6 percent of registered companies, employ 65 percent of workers and contribute close to 40 percent of our gross domestic product and for the government, close to 40 percent of tax revenue. In an attempt to minimize this economic bloodbath from happening, I have put together a list of recommendations for the government to adopt, based on a “Covid Lifeline package” tailor fitted for micro, small and medium enterprises (MSMEs).

1. Increase the SME fund immediately

We are all in agreement that the current package of P1 billion (US$20 million) for SMEs is not sufficient. I propose a financial bailout in the amount of P140 billion ($2.8 billion) aimed at assisting registered MSMEs. This amount is only the equivalent of 10 percent of the government’s total stimulus plan of P1.4 trillion ($28 billion). It is also a very small percentage compared to other countries. Thailand recently released its third stimulus package for SMEs and the total amount has reached more than $20 billion. The fund will provide a lifeline to SMEs so they can manage their cash flow and retain employees. And just for comparison with our Association of Southeast Asian Nations’ neighbors, the stimulus packages allocated for their SME sector hovers around 40 percent to 60 percent of their total bailout plan. My recommended Covid Lifeline Fund for SMEs is a paltry 10 percent.

To be continued...