Navigating The COVID-Affected World of Finance
fdu’s guest blogger, Ricky Shafier has held various positions across several Financial institutions and is now founder and director of Plexus Finance, a boutique debt advisory firm helping UK businesses access a wide range of Finance.
Back in March, COVID-19 was still a relatively unknown quantity and its impact had not yet been felt. As we fast-forward to today, all industries, sectors and walks of life are still adjusting to and navigating the effects of this pandemic. Some industries have been able to pivot and flex to fit the ‘new normal’ with innovation helping businesses thrive. Some, however, have been left behind.
The Finance industry is one that had to adapt quickly to the new world and a string of Government-backed schemes have potentially changed the lending landscape as we know it.
A new lending landscape
As the lockdown was announced, business owners quickly switched to survival mode and wave of measures were put in place to help businesses access Finance. After some teething issues, the respective schemes have injected a total of £47b in furlough payments, £11b in local grants, and £62b worth of Government-backed capital to SMEs through debt. In fact, banks lent (net of repayments) non-Financial companies just over £30bn in March which is approximately 100 times the average of net lending over the twelve months to February. This highlights the sheer reliance on debt as a tool for helping businesses maintain a healthy cashflow to ensure they’re not defeated by the lockdown.
According to a report by Ernst & Young, lending growth is forecast to slow to 7.1% in 2021. Firms as a whole are forecast to only start repaying debt in net terms, from late 2021 and as a result the return to pre-COVID economic levels could be slow paced.
But what does this mean for the lending market moving forward?
Lending right now
The main Finance options for UK SMEs are currently:
- Bank lending
- Unsecured lending
- Secured lending
- Invoice Finance
- Asset Finance
The lending landscape is dominated by the two headline government schemes: the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS). These two schemes have allowed businesses to access Finance without interest or repayment for 12 months (with the Government covering the interest and charges for the first 12 months of the loan). Provided the lending is below £250k then directors do not need to personally guarantee the Finance either. Other working capital solutions such as invoice Finance have seen a fall in amounts lent as the UK economy continues its recovery.
A report from the Office of National Statistics last week revealed 18% of businesses at severe or moderate risk of insolvency. The survey also revealed that 27% of businesses surveyed said that they had less than three months’ worth of cash reserves and as we move into 2021 working capital solutions could play an important role in helping SMEs stay afloat.
The future of the lending landscape
For many SMEs access to ‘cheap’ capital has been notoriously difficult. Banks will often take security and in a world that looks more uncertain, less business owners are looking to personally guarantee debt. The CBILS originated from the Enterprise Finance Guarantee scheme (EFG), a scheme designed to help business owners obtain Finance with the backing of the Government where lenders would otherwise refuse based on a lack of personal security. I anticipate that in the new year the Coronavirus loan schemes will be replaced by a similar EFG scheme – but don’t expect the Government to pick up the cost of the fees and interest for the first 12 months, and certainly don’t expect any repayment holidays.
If there is a positive that might come from this pandemic, it is that the lending market has been shaken up. With more lenders accredited under CBILS, expect more options for SMEs to access capital as we move into 2021 – but don’t expect the same rates you’ve seen through the CBILS and the BBLS.
More cashflow solutions?
The pandemic has seen traditional lenders move to provide more working capital solutions to help pay VAT and HMRC bills in monthly instalments. This could prove crucial as businesses focus on preserving and managing cash flow. As we move into 2021 shorter term cash flow solutions gain prominence as costs increase with the reintroduction of HMRC and loan repayments.
Invoice Finance is another debt vehicle expected to play a part for firms looking to juggle the costs of running their business and repaying loans which will start for some firms in Q2 of 2021. One thing is for sure, whilst the facilities available won’t be as generous as the CBIL and BBL schemes, businesses will not be short of options.
NB: The CBIL scheme is due to end on the 30th November. If you are looking for CBILS funding you need to ensure you apply at least 2 weeks before the deadline (4 weeks if applying through a high street bank).
If you would like to know more about accessing Finance, please email Ricky on [email protected].