15th September 2020
Reach Commercial Finance Director Gary Cain on emerging from lockdown and where best to find funding solutions as UK SMEs respond to the next phase of the crisis
Where you might have expected a huge number of corporate insolvencies right now, the Government’s support for businesses suffering acute supply and demand shocks as a result of Covid-19 has proved effective in preventing them.
Business support grants, the employee retention furlough scheme, deferral of VAT payments; business rates relief for retail, hospitality and leisure businesses, the Coronavirus Business Interruption Loan and Bounce Back Loan Schemes, have all been invaluable.
In fact the picture to May this year shows that there were 944 corporate insolvencies in May 2020 down 21% from 1,198 in April 2020 and down 30% from 1,357 in May 2019.
Preventative strategies have provided liquidity to businesses who have reduced levels of activity, whether by choice, through the impact of lockdown and social distancing, or as a result of emergency legislation.
Planning for 12 months out not tomorrow
UK businesses are entering a new phase as more re-open and attempt to return to business as usual, but are still having to work within current legislation and guidelines.
This brings new challenges. Uncertainty and sensitivity to risk means reductions in credit ratings and credit insurance limits and most lenders are focusing their liquidity and management efforts on existing clients, many of whom are struggling to navigate their way through the post-Covid environment.
The withdrawal of CBILS, furlough and the crystallisation of VAT deferment liabilities will place additional strains on working capital for businesses and reinforce the need to plan for 12 months out rather than just tomorrow.
Many businesses have relied on furlough schemes to reduce cost and protect talent. The forthcoming move to reduce that support and the fact that some businesses may not expect demand to return until later in the year, leaves a gap to be bridged somehow. And if you are not up for much vaunted consolidation in the sector what next?
Four key lender trends
For firms looking to borrow here are the four key trends we have seen which affect all types of lender:
- Term loan decisions require reassurance that the Covid-19 impact on the borrower was short-lived and well managed and that trading has now returned to pre-Covid levels
- Invoice finance facilities will need to remain effective even in the light of reduced credit limits and a reduction in bad debt protection
- Reductions in asset values will negatively impact availability of finance secured on those assets
- Reduced property valuations and an uncertain property market (reduced office space demand, long term reduction in retail space requirement, uncertain housing market) will negatively impact upon the availability of property finance.
There is however a significant amount of liquidity in the UK debt market, even for SMEs, although much of this liquidity is offered by lenders other than the high street banks.
In summary UK businesses can draw comfort from the fact that funding is available in the post-Covid world, but it may not come from the better known providers.
In addition, all lenders – mainstream or alternative – will need reassurance that a business is now stable and will continue to perform at the forecasted level – and will probably have a lower appetite to lend in general than they had before Covid-19.
Need for realistic forecasting
So we are constantly advising prospective borrowers in the sector to ensure that the proposed borrowing structure is appropriate and available; the correct lenders are approached; the prospective borrower is well prepared and ready to provide the information that a lender is likely to require to support the application.
This should include realistic forecasting, details on how often reviews of performance versus forecast will be carried out, a willingness to review budgets and cost in line with performance, and an honest assessment of what constitutes adequate liquidity.
For those smaller firms who might not have access to specialist professional support the government has just launched a new tranche of grants of between £1000 and £5000 aimed at helping firms in England to get external advice. Local Enterprise Partnerships – 38 of them – will have £250K each to distribute. We would of course commend it!
The successful navigation of this fraught period – recently dubbed the worst economic downturn in 100 years – requires proactive and collective effort over the most pressing issues.
So we are saying to businesses – prioritise deal-making with suppliers that are vital for continuity of trade. If considering creditor deferral, make sure this is clearly communicated with fair terms. If you are looking at rental holidays, collaborate. Landlords will be keen to ensure they have a future tenant. The same goes for loan repayment holidays for hire purchase, lease obligations and finance holidays – everything is on the table – so continue to be open to constructive discussion.
Three areas to explore
For businesses wrestling with immediate cash flow issues there are three approaches which are proving particularly helpful at the moment. These are Redundancy Payments Loans, Time to Pay Arrangements and a review of invoice finance facilities.
One of the most effective, and yet rarely used, options is the Redundancy Payments Loan process – offered by the government, outside of the recent furlough scheme. It’s an effective solution for otherwise-viable companies that need to reduce staff costs to stay afloat but are unable to make redundancy payments up front. The aim is ultimately to save as many jobs as possible.
Similarly, for businesses that cannot pay their tax bill on time, HMRC’s Time to Pay (TTP) scheme allows tax debts to be paid off in instalments. So far this year, we’ve rescheduled the payment of over £3.1million of HMRC arrears to allow 16 businesses to continue trading – giving us an acceptance rate of 100%. When used alongside our business critical payment review service, this can give good businesses a real chance to stay afloat.
Businesses using invoice finance should actively review their facilities on a regular basis to ensure that the financial product they are using actually fits their business and its cash-flow dynamics. When there’s pressure on sales, invoice funding alone may not provide all the working capital the business really needs.
The most important aspect of the current situation is to ensure that all parties understand how best to manage expectations. So we’re helping lenders keep their clients afloat and ensuring that SMEs in the recruitment sector get access to the funds they need whilst avoiding penalties and misunderstandings. It’s an essential collaborative approach to both short-term survival and long term revival that works for all parties.