ABL joint managing director, Alex Beardsley, recently held a webinar with Kevin Cooke of the FD Centre outlining what the funding landscape looks like as we head into a post-pandemic world.
In this blog, we highlight the key takeaways from the session.
The current landscape
The end of the CBILs and BBLs schemes is quickly approaching, with 31st March as the final deadline to submit applications. This means that any business considering using this finance option must apply for it as soon as possible.
Repayments of bounce-back loans also begin on the same date, with the scheme replaced by the Pay-As-You-Grow initiative recently announced by Chancellor Rishi Sunak — aimed at businesses that are finding it difficult to repay former coronavirus interruption loans.
It is worth noting that, although the PAYG scheme will not affect your business or personal credit score, it may influence how the lender, such as your bank, assesses your credit worthiness in future. We therefore recommend that companies use caution, as subsequent lending may be impacted.
We’ve also seen that lenders are asking organisations what their position with HMRC is, to find out if they have taken advantage of any deferrals or a TTP. This could also impact a funding application, but businesses that are up to date with VAT, corporation tax, and PAYE need not be worried.
And lastly, regarding the property market, valuations are proving to be a sticking point, with properties being down-valued by an average of 10%, and sometimes to significantly lower than what is outstanding on the mortgage.
So, what’s next?
The government-backed recovery loan scheme was leaked before the budget, and has the same criteria as a CBILs loan but without the initial 12-month interest-free repayment period. Businesses can borrow between £25,000 and £10 million, with 80% guaranteed and a max interest cap of 15% — and can use the funds for any number of legitimate corporate reasons.
Opening only for a short period, from 6th April to 31st December, applications for this will be much more stringent and we don’t yet know who will be offering the product.
We’ll also see that financial fintech is effectively ‘unplugged’, with the online lending platforms finding it difficult to source funders. Esme Loans (part of RBS) has already closed to new business, as the sector has struggled due to changes in algorithms, lender parameters, and accumulated losses.
In addition, we can see a clear divide growing between funding less than £500k, and greater than £500k. We’ve highlighted to both lenders and CBI that this gap is widening .
And lastly, we’ve noticed an increase in EOTs and MBOs, as more structured, forecast-driven lending starts trending. We want to make it clear to firms that forecasting and strategy are imperative.
The lenders
Lenders have been at the forefront of managing the pandemic, but we need to remember that they are also businesses themselves and have experienced Covid interruption. Trying to get CBILs accreditation, understanding the changing criteria, and normal lending have all but stopped due to the flood of government-backed support, and this has had a massive impact on them.
Lenders now need to understand and assume their position as we trade out of Covid.
For example, the relationship between businesses and banks has changed significantly, as the focus of these traditional lenders has altered. Banks are expecting large defaults, particularly on BBLs, as well as managing risks within their current portfolios. In specific areas, there has been no ‘new to bank’ lending and a lack of appetite to fund growth.
We must also consider those challenger banks that have continued to lend without CBILs throughout the pandemic but are now being caught up by Venture Debt Funds. These funds offer commercial loans on projection led funding above £1m and now work with bank partners to offer specific lending-as-a-service finance for MBOs, MBIs and high growth transactions.
In addition, British Bank small-cap private debt funds have stated that the average deal size was £6.5 million in 2019, compared to £222k for challenger banks, £167k for standard banks, and £77k for P2P. This shows that there is a significant gap for funding and expertise in the £1m - £5m sector. Which the Venture Debt Funds are looking to cover.
Looking to the smaller end of the lending market we are seeing more lenders turn to ‘Secured’ loans for sub £250k where before they would have had an unsecured product up to this level and a small increase in the rise of specific sub £100k and sub £50k.
In the peer-to-peer space there is little information coming out about the position of these businesses post the end of CBILS, whether they will offer the recovery loans or revert back to their traditional unsecured loan products. Other than the Esme Loans who have pulled out of the unsecured loan market altogether and closed their doors.
What’s the impact on businesses?
All of the above will and does have a significant effect on all areas within an organisation, so leaders will need to take an overarching view going forward. It is imperative that proper planning takes place, including setting out clear funding requirements for the next 12, 24, and 36 months.
Some of the impact includes:
• The need to assess if banking facilities are secure – including assets and property, such as the impact of LTV calculations on mortgages
• The banks are looking to reduce their exposure, and are doing so by cutting corporate credit cards, overdraft facilities and limiting headroom
• The implications of HMRC deferrals — although it can be a good thing to secure cashflow, this needs to be built into future financial planning
• EBITDA has now become EBITDAC — lenders are looking at the effect Covid has had on businesses.
But how can Covid impact be measured?
Firms need to take a 360-degree view to measure the effect the pandemic has had. This means not just looking inwardly, but also evaluating the impact on suppliers, customers, and other stakeholders.
We’d recommend that companies carry out a PESTLE or SWOT analysis to assess the wider implications that the current landscape has and will have on their business financially. It would be interesting to compare this to the same exercise carried out in January 2020, to truly measure the change.
So why is forecasting important?
Some enterprises have a laissez-faire attitude to forecasting, considering it as just something that accountants do that leaders may look at from time to time. This is about to change, as access to ‘easy money’ dries up and lenders want to see detailed forecasts in order to approve lending.
From a business perspective, it is vital that a 30, 60, and 90-day forecast is carried out initially, before tackling a 12, 24, and 36-month view. Here, it is important to assess whether the forecast is based on the last 12 months — which have been completely unprecedented, and unlikely to be experienced for a long time to come.
When carrying out this activity, it is not just profit and loss that should be considered, but also the effect on cashflow. Cash is the lifeblood of a business — you can be profitable without generating positive cash. Repayments of loans need to be factored in, too.
In addition, short-term forecasting should be highly detailed, but longer-term can be less so. This should identify the immediate pain points, and where funding might need to be secured and why, or where cash can be invested back into the firm.
As applications for funding become more stringent, management information needs to be incredibly accurate. Therefore, forecasting should be more than just a one-off exercise, and instead become part of routine operations — similar to servicing a vehicle. Businesses are dynamic and change constantly, so forecasting needs to mirror this — having the right person in place to carry out this task will make a huge difference.
What products are available to build into a finance strategy?
We all know that there is a current lack of quick and easy access to funds due to the impact of CBILs and the current fintech environment, but it is worth mentioning that lead time to finance is also going to take a bit longer as the underwriting process is under more scrutiny.
This is where the strategic use of finance products comes into play. Businesses need to take stock of what facilities they currently have, and consider the best options moving forward – whether that includes ABL and refinancing to adjust the cash available. Becoming aware of what products are out there is key to this strategy.
Banks have been hit hard by the pandemic, so it must be taken into account that every lender has its own risk parameters. As a result, it could be prudent to think about moving some facilities from banks to elsewhere and refinance over a longer period, to keep that good relationship with them.
Overall, firms must assess what their finance needs to do for them — do they need access to funds to fuel growth, or is it cashflow help they’re after? Specialist funders in separate areas, such as property, asset, and invoice can support this.
Having access to all the options available is vital for companies and we highly recommend that they and their advisors review them all, rather than just the first finance route they are offered.
Factors affecting your application
Our initial advice when creating your application is to review the following first:
• Know your Delphi score. This is something you can review and positively impact by filing on time and keeping your details up to date. Ideally, you want a score over 40.
• Know your purpose. Borrow for a reason and secure finance accordingly.
• Know your numbers. Ensure that your forecasting is in order.
• Know your lender. It is pointless approaching a lender that cannot meet your needs.
Commercial finance is not linear, and you must also take into account the supply chain, the macro environment, past performance, and director details.
Choosing your advisors
It is important that businesses go for the best advice, not just the cheapest. This means working with knowledgeable people that secure finance as their day job and are experts in the matter.
We’d also recommend bringing in a fresh pair of eyes to review management information and the forecasts to assess the business as a whole and take a holistic approach.
Having good advisors means that firms will be able to present information correctly to lenders, and therefore speed up the process and reduce lead times from applications to funds in the bank.
To find out more, or to talk to a specialist advisor, get in touch with ABL today.