19 March 2020

How does Covid-19 affect my business finance?

Businesses facing liquidity problems need to avoid having their finance pulled by their funders and work with those lenders to alleviate the problems – we offer practical action points and can point you in the direction of the Government help available.

The key points are:

  • Keep your lender informed
  • Check the details of your facility
  • Explore your options, including Government support

Is your business at risk of having its finance pulled?

We all hope that lenders will not be trigger-happy, but make yourself familiar with your obligations so that you can comply with them as far as possible and avoid defaulting, or potentially defaulting.

  • Reporting obligations – standard financial reporting, possible specific financial covenant reporting and, almost certainly, an obligation to report any events of default or potential events of default; give lenders early warning of anything default-related.
  • Events of default – Failure to pay principal or interest on due date is the most obvious default so, if a debt service date is coming up and you are unsure whether you are going to be able to cover it, discuss this with your lender as soon as possible. When any event of default occurs, your lender can call in (accelerate) existing facilities or refuse to make further advances (indeed, even potential events of defaults can give them this power). There are a range of other types of default including breaching your reporting or other obligations, defaults with other finance providers, default in paying other creditors, possibly even renegotiating terms with a creditor or group of creditors; keep your lender in the picture.
  • Financial covenants – check your facility documents for financial covenants, the consequences of breaching them and when they are next due to be tested. If you have concerns about compliance, talk to your lender.

How can you work with funders to alleviate liquidity problems?

You have a range of options – some of the most important are:

  • Debt service deferment; putting off paying either principal or interest – this is one of the most immediate ways of boosting liquidity, and if your lender agrees, it’s fairly straightforward.
  • Increasing headroom within a working capital facility, such as increasing an overdraft/borrowing limit – look at whether you have good quality unencumbered assets available to support this, or perhaps good cover provided by existing security (e.g. a favourable loan to value ratio).
  • Bridging finance pending raising further equity – this is most likely with your existing lender, particularly if there is reasonable security cover.
  • Extending the loan period – to amortise the debt more slowly, or move some of the principal repayment to the back end of the loan period (as a “bullet” payment) making debt service more manageable over the whole loan period. This may be necessary if the business has to work its way through a longer recession.
  • Sale of assets to raise cash – if they are subject to security or similar constraints, remember that you will need to talk to your lender about this.

All of the above may be made easier with Government support.

What Government support is there for me?

The Chancellor has recently announced a massive support package and there may well be more to follow. This is what is on offer:

  • Coronavirus Business Interruption Loan Scheme – This will be provided by the British Business Bank, and will offer more attractive terms for both businesses applying for new facilities and lenders. The scheme provides the lender with a Government-backed guarantee against the outstanding facility balance, potentially enabling a ‘no’ credit decision from a lender to become a ‘yes’. The borrower will always remain 100% liable for the debt – it is not a grant. The Government will also cover the first six months of interest payments, so businesses will benefit from lower initial repayments. The maximum value of a facility provided under the scheme will be £5m. To find out if you are eligible and for more information, visit:
    https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils
  • Covid Corporate Financing Facility – for bigger businesses, this will provide funding by purchasing commercial paper of up to one-year maturity, issued by firms making a “material contribution to the UK economy”. It will help businesses across a range of sectors to pay wages and suppliers.
    The facility will offer financing on terms comparable to those prevailing in markets in the period before the Covid-19 economic shock, and will be open to firms that can demonstrate they were in sound financial health then. The scheme will operate for at least 12 months and for as long as steps are needed to relieve cash flow pressures on eligible firms. For more information visit:
    https://www.bankofengland.co.uk/markets/market-notices/2020/ccff-market-notice-march-2020
  • Alongside this, the Bank of England has boosted the capacity of the banking system to lend to businesses by launching a new Term Funding Scheme with additional incentives for lending to SMEs. This will, over the next 12 months, offer four-year funding to banks lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to SMEs.

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About the Author
Harry Bengough, Partner, Head of Banking and Finance Team

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