SMEs: Backbone of Textile Industry

INCOMLEND

Mr. Morgan Terigi

CEO and Co-founder, Incomlend

Incomlend founded in January 2016, is a global invoice financing marketplace giving SMEs access to tech-enabled working capital solutions supported by industry-leading institutional investors. Incomlend have financed more than USD500 million in trades in over 50 countries worldwide. The online platform helps investors build their portfolio to meet their investment parameters.

What are the challenges that SMEs in the textile industry face in the current landscape?

The COVID-19 pandemic has impacted almost all aspects of the textile industry, from demand to supply. Many small and medium enterprises (SMEs) are suffering from the long-term implications of the pandemic and the recurring government measures to curb infections. Some of the most critical and immediate challenges that we hear from our customers include the sharp decline in sales and cancelled orders due to the widespread closure of physical stores. Furthermore, as garments are not categorised as essential goods and services, manufacturers and sourcing companies face mandated closure in many markets. This has caused significant disruption in supply chains, leading to difficulty in procuring raw materials and halting manufacturing operations. These factors are resulting in greater credit risk and restricted cash flow for many SMEs in the sector. As their financial health weakens, it is more challenging for SMEs to navigate the volatility and ambiguity in supply-and-demand trends in the market and react to unforeseen situations, such as late payments, cancelled orders, or even a sudden surge in demand for their products.

What are the key financial barriers confronting these SMEs?

Many SMEs in the textile industry are looking to bolster their financial health and agility to better weather the storm in the face of long-term economic uncertainty. However, many of them are often caught in a cycle where they cannot get the finance they require from larger, traditional banks. Key Points The main reason this happens is that SMEs sometimes strug• Impact of COVID-19 on textile industry gle to prove creditworthiness. • Pandemic affected on demand and supply chain As many SMEs have been placed in weakened financial • SMEs suffering from long term implications situations due to the ongoing • Significance disturbance in supply chain of the textile crisis, they might get less supindustry port from the banks and be left unfinanced. • Cash flow restricted for many SMEs Traditionally, banks tend to ex• Many SMEs end up self financing tend the on boarding process • Alternative financing methods can assist SMEs in freeing for SMEs, which results in a up working capital and regaining fiscal viability slower turnaround time. Consequently, some SMEs wind up • SMEs must discover alternative strategies to increase self-financing, which further their financial robustness limits their ability to grow their business.

How can alternative funding solutions address these SMEs’ key challenges and position them for growth?

Today, we see more SMEs in the textile sector, such as FortuneX, break down these financial barriers by accessing alternative funding solutions. By reducing their reliance on banks and diversifying their access to funding, SMEs are future-proofing their business from any economic impact such as the current pandemic. As an SME, Incomlend understands the value of having access to cash flow in a quick turnaround time and not being hampered by the long-drawn credit checks imposed by traditional banks. Alternative financing solutions can help SMEs liberate their working capital and recover their financial health. These are the foundational elements for SMEs to de-

velop more resilient business operations. It also gives them the fiscal agility to seize new revenue opportunities, such as seasonal demand for sweaters during winter. With faster access to working capital, SMEs can recover their operational expenses and execute plans with greater confidence and certainty. The improved cash flow will also allow them to finance their next production cycle and ramp up their output when the demand for their garments increases.

What are the types of alternate funding solutions suitable for SMEs in the textile industry?

We strongly encourage SMEs in the textile industry to look into non-recourse financing options, such as the off-balancesheet invoice financing that we offer. These can keep the debt-to-equity ratio low and preserve their borrowing capacity, further spreading their funding sources. With invoice financing, these SMEs are effectively selling their invoices and obtaining finance without risk. SMEs, specifically exporters, can fund their export invoices by selling them at a discount rate in return for receiving early cash for their receivables. Besides liberating working capital, invoice factoring can also insulate SMEs from debtor credit risk, especially for SMEs in the Asia Pacific.

What is the potential market outlook for SMEs in the textile sector in the years to come?

The pandemic is here to stay, and we will continue to see economic uncertainty and disruption in the textile industry in the foreseeable future. Although governments worldwide rolled out policies and programmes, such as wage support, to help cushion the impact of the pandemic on SMEs, these measures will start to dwindle over time. Furthermore, a recent OCED report highlighted that many of these pandemic relief programmes have caused SMEs to accumulate debt. Consequently, there are concerns that if governments roll back their support measures too quickly, it can trigger a wave of bankruptcies among SMEs. SMEs need to find ways to build financial resiliency through other means. The banks will still be pursuing the same path they have been walking for the last few years, reducing their trade finance exposure. Whether it is fintech or other alternative funding sources, the demand among SMEs in the textile industry will only continue to grow stronger.

FORTUNEX

Mr. Achint Bhagat

Director, FortuneX

What are the core problems that SMEs in the textile industry face?

Before the pandemic, we had a strong business pipeline and an excellent position to sustain our growth. We saw solid demand for apparel worldwide due to trends such as the rise of e-commerce, urbanization and increased disposable income. However, the closure of brickand-mortar retail stores and the drop in apparel sales during the pandemic have had significant repercussions across the entire garment supply chain. Some of our customers, who are apparel trading companies, experienced several cancelled orders during this period that impacted their cash flow.

What are the principal revenue obstacles that these SMEs face?

The repercussions across the entire garment supply chain

have led to late payment for our receivables and raised the debtor credit risk for us. According to research by trade credit insurer at radius, late payments in the textile industry Key Points in Asia impacted 64% of the total value of B2B invoices. Late • Excellent position to sustain growth payments and credit risk can • Demand of E-commerce, urbanization and rising dispos- affect our ability to finance our able income next production cycle and lead to more revenue losses. • Late payment directly affected to the ability to finance

How can alternate financing

• Credit risk can affect on production cycle and lead to more solutions meet the key conrevenue losses cerns of these SMEs and posi• Alternative working capital and funding solutions tion them for expansion? • Creating a financial foundation that is more resilient to Incomlend offers the Invoicfuture interruption ing Finance Programme that enables FortuneXto cash in an • Manufacturers waiting for opportunities to advance their invoice as early as three days digitalization plans following the shipment of our • Advantage of substantial competition products. The programme insulates us from credit risks and safeguards our financial health, which is especially vital as the retail space and demand for garments remain volatile due to the pandemic. The alternative working capital solution allows us to retain our customers by offering more competitive payment terms. Our usual payment terms range from 30 to 60 days post the

delivery of our receivables. Thanks to Incomlend, our customers now have the option of paying for the shipment’s invoice value up to 120 days later, alleviating the stress our key customers are facing concerning cash flow and strengthening our partnership.

What are the different sorts of various financing options available to SMEs in the textile sector?

We’re looking into more alternative funding solutions, particularly off-balance-sheet financing options, to provide us with the capital we need to place ourselves in a better growth position when the economy recovers without the heavy burden of a loan. Additionally, by diversifying our access to funding, we are laying a financial foundation that is more resistant to future disruption. Our customers in the USA are already seeing retailers reinstating cancelled orders and placing new ones. With improved access to quick turnaround working capital, we can swiftly act on new orders or even increase our output to meet seasonal demands that allow us to capture new revenue streams and grow our business.

What is the prospective market forecast for textile SMEs in the coming years?

For buyers, risks will potentially become a vital factor when deciding on sourcing destinations and evaluating suppliers. Buyers will emphasis manufacturers’ production capabilities and efficiencies to mitigate risk and ensure a more reliable supply chain. The pandemic could also accelerate the apparel industry’s technology adoption, leading to faster and more efficient production across the industry. Manufacturers will look for opportunities to advance their digitalization plans to respond better to rapidly evolving consumer demands. Those who succeed will have a substantial competitive advantage over their peers. However, some manufacturers, especially SMEs, might not invest in technology in the near term due to the pandemic’s economic uncertainty and financial pressure. Again, this highlights the importance of having access to working capital and funds to pursue investments and opportunities to make a meaningful impact on their business.

NEWS UPDATE

JUTE EXPORTS ARE FALLING OWING TO EXCESSIVE FREIGHT COSTS

The rising supply of jute and jute goods from Bangladesh has come to a halt due to the increased raw fibre prices and historically high freight charges. Jute millers earned $212 million in exports in the first quarter of the financial year, a 31% decrease year on year, according to data from the Export Promotion Bureau (EPB). “We’re quite depressed. Sellers are not making new orders until they are absolutely necessary “Chairman of the Bangladesh Jute Mills Association Mohammad Mahbubur Rahman Patwari (BJMA).In the last year, raw jute prices in the domestic market have remained elevated, while container freight costs have increased nearly tenfold to $18,000$19,000 due to the global shipping problem. The latest setback for the business comes only months after export revenues from jute and jute items reached $1.16 billion in fiscal year 2020-21, the most on record, due to higher raw jute prices and greater demand. Buyers, according to millers, are cutting orders against the backdrop of spiralling natural fibre costs, which hit a historic high of more than Tk 5,000 per maund in February this year due to increasing export growth and a reduction in agricultural production in the previous year. Furthermore, rising container freight charges exacerbated the issue for jute mills, which manufacture yarn, twine, bags, sacks, and other jute items for primarily export industries. Farmers in Bangladesh have grown over 80 lakh bales of jute per year during the last five years, thanks to favourable weather conditions. The fibre is mostly used in the industrial sector. The market has received a fresh harvest of raw jute, however the raw jute is selling for Tk 2,500-Tk 3,100 per maund. According to Patwari, prices remain high, and foreign purchasers are shifting to substitutes to jute goods. Jute yarn accounts for about two of jute and jute goods export revenues. The yarn is utilised in carpets, and carpet manufacturers in Turkey are the primary buyers of yarn manufactured in Bangladesh. “However, many consumers are utilising recycled cotton for carpets,” Patwari pointed out. According to the EPB, yarn and twine manufacturers were the hardest hit, with export receipts falling 40% year on year to $127 million from July to September. “A lot of jute mills have stopped production,” Patwari explained. According to Patwari, the scenario may recover by November or December.