THE Covid-19 pandemic drastically impacted businesses worldwide, with small and medium enterprises (SMEs) in the Philippines bearing much of the economic burden. SMEs, which constitute over 99 percent of registered businesses in the country, faced immense challenges as the pandemic unfolded. Many had previously taken out loans to expand or maintain operations, but the economic downturn left them struggling to meet financial obligations.
For the leasing and finance industry, which plays a critical role in supporting SME growth, the pandemic was a turning point. As SMEs defaulted on loans and many stopped operations, leasing and finance companies faced a surge in non-performing loans (NPLs) and financial strain.
Short-lived outlook
Before the pandemic, the Philippines experienced robust economic growth, with SMEs at the forefront of this expansion. Leasing and finance companies provided capital to help businesses invest in new technology, equipment and infrastructure. This enabled SMEs in sectors like manufacturing, transportation, and construction to grow, supported by flexible payment terms that spread out asset costs over time.
However, the optimistic outlook that fueled this growth was short-lived. The arrival of the pandemic in early 2020 drastically changed the economic landscape.
The government-imposed lockdowns to curb the virus had an immediate and devastating impact on SMEs. Many businesses were forced to close temporarily or faced a sharp decline in demand. Retailers, restaurants and service providers dependent on foot traffic were hit hardest, while supply chain disruptions compounded the challenges.
As revenues plummeted, SMEs with pre-pandemic loans struggled to make payments. With diminished cash flow, many were left with the difficult decision to either continue operations under immense financial pressure or close permanently.
Caught flatfooted
Leasing and finance companies, which had long provided crucial financial support to SMEs, were caught flatfooted. A surge in NPLs left them exposed to significant financial risks, as their SME clients could no longer meet loan obligations. While SMEs benefitted from government programs like Bayanihan Acts 1 and 2, leasing and financing companies received no such assistance and had to navigate the crisis independently.
Many companies offered moratoriums, restructured loans and extended flexible payment terms to help SMEs survive, but this placed further strain on the leasing and finance industry.
Despite these efforts, many SMEs could not adapt quickly enough to the digital platforms that became essential during the pandemic. Businesses in retail, hospitality and travel were particularly affected, with numerous closures impacting the leasing and finance industry. As businesses shuttered, these companies faced a growing portfolio of non-performing assets, such as repossessed machinery and vehicles.
However, some SMEs demonstrated resilience by embracing digital transformation. E-commerce, food delivery and online services provided lifelines for those able to pivot quickly. This agility highlighted the importance of innovation during crises.
Financial flexibility
The pandemic underscored the importance of financial flexibility and the need for both SMEs and the leasing and financing industry to adapt. SMEs must build financial cushions and embrace digital tools, while leasing and financing companies need to refine their lending practices, focusing on resilient industries and offering tailored solutions and the need for a more conservative yet adaptive and flexible approach to lending.
The pandemic has been a defining moment for both SMEs and the leasing and financing industry. While the road to recovery will be long, the lessons learned during this period of crisis can help businesses and financial institutions alike build a more sustainable, resilient future. Those who adapt and innovate will not only survive but thrive in the post-pandemic world.
Claribelle A. Ykutanen is an experienced lawyer and financial advisor with a strong background in corporate law, finance and insurance. She serves as the assistant vice president for the remedial management division and legal counsel at League One Finance and Leasing Corp., where she provides strategic legal and business advice to support the company’s growth.
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