Leaning into change


News - 28 October 2020

Businesses are looking forward to a dramatically different operating landscape in 2021. It’s time they start asking if their financing models need to change too, say ABN AMRO’s Chris Pacey and David Ward.

As European markets make their first tentative steps out of summer lockdowns, and potentially into new ones as the second wave of the virus hits economies all over the world, businesses that have been allowed to open their doors find themselves operating in a radically different environment.

While remote working remains pervasive, many companies are keen to reignite the energy and creativity that video conferencing technology may not always allow. Organisations – from recruitment firms in compact offices, to manufacturers where space optimisation is key – are grappling with new ways of working.

Some businesses, for example in healthcare and logistics, have actually flourished against the backdrop of Covid-19. Others have proved remarkably adept at pivoting their operations to meet these unprecedented challenges, often by enhancing their online channels, as well as embracing the power of tools such as Microsoft Teams and Zoom.

Despite some businesses seeing a collapse in revenue, government support measures, from furloughing to loan schemes and tax deferrals, mean many companies find themselves in a more buoyant cash position than before the crisis struck.

It remains to be seen, of course, how the world will evolve. Localised lockdowns and second wave outbreaks are already a reality for many across Europe. Social distancing could become a normal part of our everyday lives for some time. Equally, if early indications are anything to go by, rules might be widely ignored, simultaneously keeping up activity levels, but risking more draconian regulations on daily life.

What hasn’t changed over recent months? Uncertainty remains the pervasive sentiment. Forecasting has been all but impossible given the vagaries of the virus, public sentiment and rapidly changing policy. It is clear that government Covid-19 support measures will not last forever; amortisation of loans will resume after repayment holidays and fiscal payments will become due, creating increased pressure on liquidity.


Calm before the storm

Companies are already bracing themselves for a new wave of working capital pain. Regrettably, many that availed themselves of the furlough scheme at the outset are now moving towards redundancies as that scheme winds down. Businesses are also beginning to re-evaluate their property needs. Anecdotally, some are shunning offices altogether; others are exploring reduced floor space and hotdesking.

We are seeing companies rethink their financial structures and debt burden, too. Covid-19 revealed just how close to the wind many businesses were sailing, over-levered and critically short on cash reserves. As government support is eased and the reality of Covid-19’s economic impact is laid bare, companies are also reconsidering their sources of finance.

This is where the supreme flexibility of Asset Based Finance (ABF) comes into its own. ABF solutions typically provide access to greater levels of liquidity because borrowing limits are based upon collateral, rather than traditional financial metrics. That makes ABF ideally placed for companies weathering uncertain times – not least because it provides them with the firepower to exploit short-term opportunities and any more robust recovery in 2021. The more a company sells as conditions improve, the more cash it can generate quickly from invoices, for example, to support further growth.

Of course, the flipside is that if turnover declines, the amount of cash generated by an ABF arrangement will also fall. That’s where a broad-based finance provider really makes a difference.

During the pandemic, our focus has been on being a financial wingman for clients, bringing to bear both our breadth of experience and our different capabilities to go above and beyond just invoice discounting. In the earliest days of the crisis, for example, we launched a Covid-19 pandemic Taskforce in each of our jurisdictions. Our Taskforce teams incorporate commercial and risk expertise, and are empowered to make quick turnaround credit decisions.


When speed is of the essence

One of our Taskforce’s first challenges was to draft a streamlined credit application template for relationship managers – and revise our underwriting processes to be even more responsive while applying more nuanced approach to applications. This has made it easier for the Taskforce to review and underwrite credit decisions, including the provision of additional solutions, repayment holidays and a raft of other measures to ease clients’ cash flow positions.

We have recently launched the ‘Next Phase’ support measures to assist our clients during the ‘unwind’ period, when Covid-19 measures are eased. As well as some deferred payments falling due, the Government is going to regain its status as a preferential creditor at the end of this year, which will affect the borrowing capability on certain assets.

It is impossible to judge how long-lasting the impacts of the Covid-19 will be. But it is already painfully apparent that the need to re-evaluate business and financial models has become urgent. At ABN AMRO we know that businesses need space to grow, create options – and address their cash flow requirements for short-term survival as well as long-term success.