I hope you are well.

As we appear to be moving gradually out of lockdown, the questions that businesses must ask are:

  • How quickly can my business get back trading at pre Covid levels?
  • What will be the impact on supply chains?
  • How will cash flow be affected?
  • What finance will be available?

With this in mind, I have been looking at the future of financing for SMEs and what products may be available. These are my thoughts.

All businesses are affected by the state of the overall UK economy, so how is that looking?

  • Bank of England Base Rate currently is 0.1%- the lowest it’s ever been!
  • 8.4m employees were furloughed at a cost to the UK Treasury of £15bn.
  • Expected year end unemployment rate is 7%
  • GDP Growth Rate in Q1 2020 was minus 2% and is expected to be much worse in Q2
  • 10% of UK Economy closed their doors on 20th March 2020 (Retail and Hospitality)
  • 4 in 10 businesses have closed their UK Operations for a prolonged period of time throughout Covid-19
  • Effects on supply chain shortages globally have created issues for UK businesses that otherwise may have continued to trade.
  • The UK economy could shrink by as much as 14%

Pre Covid the state of lending and business confidence was healthy. In 2019 gross lending totalled £24.3bn which was only fractionally down on the previous year. Loan approval rates had remained stable at about 80%of applications agreed and SMEs continued to have borrowing headroom with nearly half of total overdraft facilities unutilised. Confidence was high with Brexit and the General Election behind us…. And then Covid-19!!

So where does this leave us and what do we need to planning for?

The many government measures introduced have been a life line to many businesses but all businesses need to be conscious of and planning for financing at key points coming up:

  • In July, 3 month payment holidays start to end.
  • In August, larger contributions are required from employers for the furlough scheme
  • In November, furlough ends
  • In December it’s Xmas
  • And in April 2021 tax deferments are due and payments for CIBLS and BBLS start.

Most businesses have accessed either CBILS or BBLS which increases the amount of debt on the balance sheet and once repayments kick in, debt serviceability ratios will affect a firm’s ability to access additional lending and put additional pressure on cash flow. We will be operating in an unstable (unknown) environment and supplier terms could decrease if credit insurances becomes more difficult to access.

I suspect that there will be fewer lenders and that those lenders will be more selective:

  • Unsecured lending will be hard to come by over the next 12 months. CBILS will dominate this market for as long as it’s available and for those companies that have not already accessed it but we’ve already seen a tightening of criteria.
  • It is unlikely that lenders will consider businesses with less than 3 years trading history.
  • Non-homeowners are unlikely to be considered.
  • Acquisition finance and standard refinancing deals will be minimal.
  • The small cash flow loans that have been prevalent over the last few years will be unlikely with most lenders probably opting for a minimum lend of £50,000+
  • Commercial Mortgages are likely to have a reduced LTV as lenders and valuers become more conservative.

Whilst the above suggests some tough times ahead, with the right strategy and planning, funding will still be available. Some of the products available to help companies and businesses will be:

  • Invoice Discounting. Over the last 7 years the number of businesses accessing ID has reduced from about 47,000 to circs 40,000 in 2019 due in the main to the growth in unsecured cash flow lending. Invoice Finance is predicted to grow over the next 12 months with estimates of in excess of 50,000 companies accessing this facility. Two of the main reasons for this are that the facility can grow in line with the business whilst limiting PGs on the owners.
  • Asset Finance. This allows extraction of cash and by refinancing existing deals, can reduce monthly payments.
  • Secured Lending/Overdraft facilities. It is likely that there will be a reversion back to more secured lending due to lenders looking to mitigate risk. Revolving credit facilities secured against property and where the business only pays interest on the amount outstanding will also be more available.
  • Crowdfunding. There has already been a spike in British business campaigns.
  • Equity Investment. There are benefits to this type of funding in that there are no monthly repayments and such funding can support exponential growth.

With the change and uncertainty, it has never been more important for a business to speak to an adviser about how they structure their finance facilities. It is the adviser’s job to advise and restructure where appropriate and to keep up to date with market changes. According to recent figures from the Bank of England those companies which get external support- that involves working with a broker or an accountant, are 25% more likely to become a high growth firm.