How Covid-19 can change the world of corporate finance

The current pandemic will see the world of corporate finance evolve increasingly beyond traditional bank lending, writes business lawyer Pauline Rigby.

Prior to the outbreak in the UK, there was a growing trend towards alternative business financing coming from outside high-profile lenders. In part, this was due to alternative lenders adopting digital technologies, which improved their pathways to market and awareness of corporate borrowers.

However, the trend has also been propelled by a growing difference between the financing needs of businesses, especially SMEs, and a resonance among institutional lenders.

A report from the SME Finance Forum in 2018 estimated that SMEs faced a financing gap of $ 5,000 billion, with 41% of those companies having unmet financing needs.

Fast forward to this year and SMEs have taken on record debt levels thanks to the Coronavirus Business Interruption Loan Program (CBILS) and Bounce Loan Program (BBLS) measures introduced by the government.

As the UK economic recovery continues, companies with strong fundamentals and plans for future growth will look for alternatives to support their ambitions.

SMEs adopt the alternatives

SMEs have turned to other sources of investment such as Private Equity, with a realization that there are options for a partial investment, rather than having to make a full sale.

Whereas previously small businesses feared ceding control to private equity firms, they now see them as partners who can provide both funding, network and expertise to accelerate growth.

There is also a better understanding of options regarding long-term capital and development capital, which allows business owners to invest for a minority stake, so that management teams ultimately have control of the business. business, as well as capital to fund business growth plans.

Asset-Based Lending (ABL) has also proven popular among SMEs. Businesses are much more comfortable securing capital against goods and equipment they own or debtors for whom they have delivered goods and services, instead of going into debt.

Debt has also been avoided through agreements with the help of vendors, which further benefits some SMEs as they sell non-core parts of their businesses in order to better prioritize the concentration of capital and resources.

More than money

These alternative forms of financing resonate with SMEs for three main reasons. They are more accessible than banks, offer more than capital and are often more dynamic than rigid loans. It is for these reasons that the impact of Covid-19 will see more and more SMEs turning away from bank loans.

Accessing finance through traditional lenders can be restrictive and time consuming. More often than not, SMEs find that banks do not share their assessments of risk and growth potential. The end result is either a loan that does not fully fund an SME’s projects, or a loan that arrives too late to realize the opportunity.

Unfortunately, some banks only reinforced their perception of inaccessibility among some SMEs during the lockdown. The feedback appears to be that a large number of companies have struggled to access borrowing quickly, although this is a very low risk for banks.

This has reinforced the conviction of some SMEs that traditional loans are too geared towards the interest of making money for the stakeholders of the bank. Businesses that are looking for growth or those looking for ways out of trouble often want more than money.

They want advice, experience and contacts that add value to them. They want capital that works as hard for them as it does for the lender. This is why the EP affects SMEs so much. They see the value of releasing equity capital to a partner who has a vested interest in the success of their business.

In addition to an injection of cash, PE can bring new connections, new ways of thinking and problem-solving, management incentives and economies of scale that could previously be beyond a SMEs.

Financing can be structured to provide businesses with a more dynamic means of financing that is better suited to achieving their objectives. The PE partner can also draw on his experience to offer new perspectives that show new possibilities for growth.

Resilience and reinvention

The financial effects and disruption to business of the pandemic have undoubtedly strained businesses and will continue to frighten some for some time. While this will likely lead to heightened vigilance, risk aversion, and some form of funding slowdown, it will also encourage innovation and creativity.

We’ve seen companies rethink the mainstream during the lockdown, with some completely reinventing themselves. Companies have reused products, equipment and resources to meet new demand and create revenue streams where others have dried up.

This creative thinking will extend to financing, as SMEs continually turn away from banks to seek more accessible, dynamic and value-added ways to finance their businesses. This will spark a greater appetite for alternative finance and SMEs should make sure to explore all options to find the most suitable solution for them.

Working with outside advisors such as lawyers and accountants will help SMEs take an independent view of what they want to accomplish. This will prove effective in helping them find ways to structure mutually beneficial financial arrangements that serve the interests of all parties and move away from debt-based and biased borrowing by lenders.

Pauline Rigby is Head of Corporate at Forbes Solicitors

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