Maintaining liquidity became a hot topic for business in Serbia in the aftermath of the months-long crisis and state of emergency caused by the COVID-19 pandemic.
Liquidity, defined as a debtor’s ability to settle debts towards their creditors, became more significant due to the economic fallout brought by the pandemic, and the fact that now, once the state of emergency has been lifted, the economy is expected to resume as usual after being stopped dead in its tracks at the start of the pandemic and incurring immense losses during lockdowns.
When faced with liquidity issues, businesses may opt to sell parts of their property or negotiate postponement of due dates with their business partners to settle debts and avoid potential forced collections or litigations. However, what other options are available to businesses in Serbia to maintain their liquidity in the current situation?
Commercial loans
Businesses can always opt for a variety of commercial loans offered by business banks to finance current liquidity. This option is even more enticing now, given that the State agreed to act as a guarantor so that businesses can obtain more favorable terms and conditions of loans from banks, as part of Serbia’s economic support scheme for local businesses (read more about this guarantee scheme here). Apart from bank loans, business can also apply for loans offered by the Serbian Development Fund for the very purpose of maintaining liquidity (more information on these loans is available here).
Founders’ loans
With businesses hit hard and liquidity jeopardized, a company’s founder (or founders) may decide to lend some money to the company as a short-term founder’s loan. Such “financial injections” are carried out on the basis of loan agreements which must define the loan amount, repayment dynamics, purpose of the loan, and other necessary contractual elements.
In order to prevent the adverse tax treatment of the loan by the Tax Authority, the company should repay the loan when and as agreed. If the company does not repay the loan amount to the founder, the debt can be converted to equity, which would increase in the company’s share capital and terminate the loan repayment obligation.
Factoring and forfeiting
Factoring and forfeiting are types of financial services where undue future claims for delivered goods or provided services are bought and sold. Users of factoring services are usually businesses who need to obtain funds from their claims before due date in order to maintain current liquidity, by selling the claims against domestic debtors to a factoring company. Forfeiting is similar to factoring but is based on the sale and purchase of long-term future claims against foreign debtors.
Given that all risk related to collection of future payments is transferred to the factoring/forfeiting company who bought the claims, the company selling the claim cannot hope to achieve price equal to the amount to be claimed. Nevertheless, factoring and forfeiting services are proper means of acquiring “instant” liquidity.
Corporate bonds
As part of Serbia’s measures to support the economy in the attempt to alleviate the consequences of the state of emergency, the Government adopted the Decree on issuance of securities, which simplifies the regulatory procedure for issuance of securities in the 180 days following the abolition of the state of emergency (read more on this topic here). Issuance of securities/bonds by joint-stock companies and limited liability companies in line with the Decree allows them to acquire significant means which may then be utilized to cover the company’s liquidity needs, without taking out loans from a business bank or the Serbian Development Fund.
