If the turmoil of 2020 has taught us anything, it’s the importance of remaining fleet of foot. For example the speed and decisiveness of the government support schemes has been unprecedented, and all the more effective, for arriving at pace.
The Financial Directors of the UK’s army of small and medium-sized businesses, many of which have been battered and bruised by social distancing measures, have also had to pivot their strategies repeatedly as operating parameters have shifted. Lenders, too, have been called upon to show flexibility and flare, now more than ever, when working alongside our clients.
The reason is well summed up in the data. According to PwC’s 2021 Working Capital Survey, Q2 2020 revenue was 16% less than the same quarter in 2019; but working capital has reduced by only 6%, “leading to a five day increase in net working capital (NWC) days,” says the report. “The most significant shift is visible in inventory, where inventory holding days increased a further eight days, representing a swing of 15% year-on-year.”
PwC says aerospace, automotive, hospitality & leisure and industrial manufacturing have been hardest hit. “As economies come out of lockdown, the pull on working capital is likely going to get worse before it gets better,” the report continues, “especially in producing industries or highly seasonal sectors, where there will be a lag between the cash outflows from sourcing materials and producing inventories ready to sell, and the cash collected from sales.”
That makes financial flexibility a crucial foundation for operational agility, both during and after the pandemic. And the long-term needs for operational agility go way beyond pandemic responsiveness. The digital revolution creates a constant battle for relevance. Meanwhile, the “will they, won’t they” saga for a trade deal between the UK and EU means companies have to be ready to leap in either direction.
“Failure is not an option”
We work with some incredibly resilient client management teams, whose approach is best summed up as “we’ll find a way.” (If you’ve ever seen the movie Apollo 13, the quote from mission director Gene Krantz as he gets his team to create options for bringing the stricken crew home is apt: “failure is not an option”.)
We’ve been at the side of Recruitment Investments as it’s made three acquisitions during the pandemic, betting on a recovery while seeking out assets at incredible value.
Engineering contractor Van Elle has benefited from a new flexible debt package that creates a platform for growth ahead of fresh investment in infrastructure and housing in 2021 – and means it can exit a potential onerous existing overdraft facility.
The international lockdowns in which whole segments of the economy have been forced to reinvent their business models has taken the need for agility to new levels – starting with the practice of flexible working. The idea of whole workforces confined to their homes – or operating in “bubbles” – which would previously have been the preserve of disaster recovery training sessions became an everyday reality with, in many cases, remarkable ease.
Companies have also been forced to build flexibility into their supply chain management where it may not have previously existed; or else change their production or delivery models.
Often, this flexibility has been a matter of survival. A local pub serving takeaways to maintain revenues and customer loyalty is a perfect example. One of our recruitment customers, meanwhile, which specialises in hiring healthcare professionals, refocused its attention on supplying PPE – providing product, rather than people, for the very first time.
In order to either adeptly sidestep disaster, or else grab at fleeting opportunity, a company must have access to the necessary cash reserves. And while the big beasts of the corporate jungle have been tapping capital markets like never before, for companies with a turnover of £20m or less, the options have been far more limited.
Government support schemes have proved indispensable – and opened up space for business to develop more options. We like to help them open up that space, too, and have been working with both new and existing customers to provide fast and flexible finance where it is required through the Coronavirus Business Interruption Loan Scheme (CBILS).
And we continue to act as a financial wingman for our customers as they face what remains an uncertain future. Localised lockdowns are proliferating amid second wave outbreaks, and while we expect some variation on CBILS to be announced soon, to date the future of government support remains unclear.
Asset based lending (ABL) can bridge that gap, helping mid-market businesses to be more agile in this environment. Why? The key is its flexibility. Because ABL is driven by the asset base of the company – receivables, inventory, property, plant and machinery – the funding flexes up and down with the business’s needs. By contrast, overdrafts and term loans are notably intransigent – and traditional banking providers themselves have seen their agility constrained by risk and regulatory requirements.
The advantage that we have is precisely the same flexibility and agility that we have admired in our mid-market clients. Like them, we’re smaller and nimbler than many of the big banks, meaning we are quick to get funds where they need to be.
We’ve been able to open funding lines for companies such as Riva Foods, whose hospitality customer base dried up almost completely at the start of lockdown. A substantial confidential invoice discounting solution means that as soon as business picks up, Riva will have the finance to ensure they don’t run into working capital constraints.
We have also demonstrated our flexibility by extending our appetite - prepayments, funding periods and concentration , making us one of only two providers that have adopted the CBILS top-up facility. And while the big banks are preoccupied with figuring out what is on their books after a stampede of CBILS and Bounce Back Loans, we are once again having interesting conversations about where our mid-market customers go from here.
The only certainty is uncertainty
There is no doubt that challenges will remain acute into 2021 – Covid-19 will take time to unwind, even with vaccines in production; Brexit remains an unknown; and the wider economic environment is unpredictable. As government support, in particular the furlough scheme, is wound down, small and mid-market businesses everywhere will be forced to re-evaluate their working capital needs to meet labour costs and deferred tax bills.
But we also know that change brings opportunities, and that’s why creating the space to succeed and the agility to seize opportunity is so important.
Can we predict anything firm for 2021? Will the vaccination programme send us hurtling back to business as usual? Will the ‘new normal’ bring with it changes to business and society that fleet-footed companies can use to their advantage? Regardless of what happens from here, we are ready to help mid-market businesses with a proven ability to adapt and to maintain the headroom needed to react to changing circumstances.
Companies that display that level of agility will stay resilient in the months and years to come. In our next article, we’ll look at ways in which ABL can support mid-market businesses and how we’ve been able to open up space for business growth.
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