The start of a new month is a critical marker for the ledger of every business but none more so than those at risk of financial and cashflow stress. Given that every sector across the economy has been put on alert by the outbreak of coronavirus, the first 10 days of April, and indeed every month following, will reveal the health of the nation’s businesses and just how willing they are to let go of cash as invoices become due.
We spoke to Restructuring Advisory Partner Lionel Blackledge regarding the potential fallout for the asset-based lending sector and those who rely on it for liquidity.
Lionel: In a normal month, it is not uncommon for around 85% of invoices to be settled within the first 10 days. April will therefore be an interesting barometer to start understanding the working capital implications for businesses. If, as anticipated, payments slow down materially, we are likely to see a large number of businesses who are funded by way of invoice finance breach their debt service covenant.
Lenders will need to consider their response carefully as lending portfolios are almost certain to come under stress, while opportunities for new lending are drying up. Although there will be a number of virtual meetings to discuss new funding opportunities, it is more likely in the short-term that credit functions will be focused on managing the challenges of existing clients as opposed to writing new deals. That being said, if lockdown is eased and businesses can start physically returning to work, there should be a significant uplift in deals that will call upon ABL funding to help businesses recover and grow.
Lionel: A potential reaction to the stress of reduced liquidity could see businesses re-aging their debt so that unpaid invoices don’t go beyond the recourse period. It is conceivable that this type of activity won’t become visible for two to three months – giving some businesses an extended stay.
Additionally, the current economic climate could lead to a potential increase in the level of pre-invoicing as business owners or directors look to find ways of raising working capital to keep their business afloat.
Lionel: For many, lockdown will mean that goods are stuck in warehouses and are unable to be shipped and invoiced against. Additionally, those goods may be perishable or have a short life span or be out of season by the time the health crisis has eased.
The government has announced protective measures to prevent landlords from taking forfeiture action for the next three months. However, lenders who have some form of inventory facility should ensure they have a full understanding of the negotiations their clients are having with landlords and are ready to react in due course when any such forfeiture restrictions are lifted.
Put simply, missed payments make it possible for credit insurers to begin pulling cover. A loss of cover will be a major blow for most business and likely prove terminal in current circumstances. As such, it’s critical that this doesn’t happen on a wholesale basis – something the government will no doubt be pressuring the insurance industry on.
It’s clear that we, as a society, really are all in it together. It’s for that reason that businesses and lenders keep the lines of communication open. Lenders are expecting a shortfall in payments during the crisis and are identifying the sectors and sub-sectors likely to be hit worst. They will naturally want to understand how they can help businesses survive the coming months. In times such as these, silence will prove a major tell so speak up early and act in good faith.
FRP is on hand to support businesses through the ongoing challenges of COVID-19. If you have any questions about your lending portfolio or working with a lender, please do not hesitate to contact us.