Mind the insolvency gap
Taking the stress out of ‘stressed transactions’ in 2021
A number of initiatives have been put in place over the past year that have served to significantly suppress the rate of business insolvencies. The temporary ban on winding up petitions and evicting commercial property tenants, together with Government COVID support including CBILS, BBLS and furlough schemes, may have stemmed the tide to date. However, there is an inevitability that the insolvency floodgates will burst open in 2021 unless there is continued intervention. Alarmingly, the Red Flag Alert research for Q3 2020 from Begbies Traynor has reported that as many as 557,000 businesses now find themselves in ‘significant distress’ 1.
Latest data from the Insolvency Service has revealed that the number of company insolvencies in England and Wales rose to 1,228 in December 2020, an increase of 9.2% on December 2019.
The sense is that when the moratorium ends, the so-called ‘zombie firms’ with irreparable underlying liquidity and profitability issues and mounting accumulated debt will only be allowed to kick the can down the road for so long. At least 3,300 UK business will face collapse when support is no longer available, according to a recent article published in Accountancy Daily 2.
What does the future look like for stressed but otherwise viable businesses?
Many successful businesses in very profitable sectors have become impacted by the pandemic, adversely affecting their working capital. However, this does not automatically make them inherently bad businesses overnight.
The independent asset-based lending (ABL) sector plays a key role in creating the predictability and stability of funding that businesses in stressed situations so vitally need. ABL unlocks high levels of working capital across all asset classes with Invoice Discounting at the core, supplemented by loans against Stock, Plant & Machinery and Property. Cash flow loans are also available, subject to EBITDA, to provide additional headroom.
We recognise that too much debt within the financial structure of a business can also severely restrict its recovery. Bumping up against funding limits leaves no contingency for any bumps in the road on the horizon. Refinancing using an ABL structure can help to give businesses in this position a new lease of life.
The phrase ‘patient capital’ is being used more and more for very good reason; it has never been more important to give the operational restructuring process the necessary time and resources to achieve the beneficial outcomes that all stakeholders are looking for.
Independent asset-based lenders with proven through-the-cycle experience should be the natural first port of call for advisers working with stressed but viable businesses – particularly those with experienced management teams and robust plans in place for recovery and growth.
We should not sugar-coat the UK’s economic position going into 2021. The global pandemic will continue to dominate both news and company agendas and US-China trade tensions are ever-present.
It is therefore essential that businesses are given the opportunity to explore the optimal funding options available, to ensure they are in the very best shape to face the challenges that lie ahead.
We are conscious that in the current environment, accountants and corporate finance advisers will be encountering these situations with businesses every day in the context of restructuring scenarios and the inevitable uptick in ‘stressed M&A’ transactions.
At Praetura Commercial Finance, we actively welcome and encourage commercial conversations in support of SMEs that require higher levels of funding. Our aim, as always, is to listen, to understand the requirements of the business and to respond with the flexibility, speed and amount of working capital that will enable them to transform their future.
Please contact me on 07867 315569 for an initial confidential discussion or email me at email@example.com.
1 Accountancy Today. McGuire, L. (2020, December 16). 557,000 UK businesses in ‘significant distress’ https://www.accountancytoday.co.uk/2020/11/02/557000-uk-businesses-in-significant-distress/
2 Accountancy Daily. Jakubowski, Z. 3,300 companies at risk of bankruptcy when insolvency ban lifts. (2020, December 10). https://www.accountancydaily.co/3300-companies-risk-bankruptcy-when- insolvency-ban-lifts