When considering all the options for immediate cash needs, managers should keep an eye on the longer term impact, in both financial and reputational terms, says Robert Hanna
Many businesses are today under tremendous pressure. The impact of coronavirus is rapidly being felt across all sectors of the economy. With customers seeking to protect their own cash by delaying payments, or deferring projects, income for many companies will be down. And with fixed costs, there is often significant overhead which cannot sustainably be reduced. As many businesses do not have substantial cash buffers, the need for suitable sources of finance which have short term benefit but don’t hamstring the firm in the long term has never been greater.
Of the myriad finance options out there, five are likely to be under active consideration by managers: working capital optimisation; bank overdraft facilities; equity finance; government coronavirus support; and potentially litigation finance. Each has benefits and costs. Some of these levers will be more familiar to management teams than others.
1Working Capital. Timely issuance of invoices and chasing payments are established disciplines. The challenge today is that customers who themselves are under pressure are pushing back on paying bills already issued. Managers may, therefore, be reticent to chase unpaid bills let alone issue new ones to avoid damaging relationships. Some businesses may look to use a factoring company to provide immediate cash flow, but this may suggest their business is distressed. Others may seek to delay payments to their own suppliers, but this risks reputational damage. A balance must be found to secure cash today without causing longer-term damage.
2Bank overdrafts. Companies may have credit facilities with one or more lender. Where good relationships exist, and covenants allow, it may be possible to seek an extension of agreed facilities in the short term. Whilst base rates have fallen, banks will apply risk-based pricing to any new facilities granted, which may mean costs are prohibitive. Firms will also need to consider the long-term impact of liabilities taken onto their balance sheets – debts will one day need to be repaid. For many firms, bank facilities will be low down the list of preference but may be the default choice where limited knowledge of alternatives exists.
3Equity finance. Often seen as the ultimate goal for private companies, seeking capital from the markets may be an option for some. But for those not already public, floating in today’s environment will likely be unachievable. So for private companies, seeking an equity infusion from existing investors may be the only option. This will probably be unpalatable but is usually speedy to implement. Owner finance is politically unpopular but is likely to be on the agenda of many SME management teams who have not yet explored other options.
4Government support. This is a rapidly evolving area with numerous options, the benefits and costs of which are yet to become clear. Facilities coming on stream include grants for ‘furloughed’ and sick staff wages, deferred VAT bills, loans for SMEs and debt facilities for larger businesses backed by the Bank of England (though in practise the collateral for these lines of credit may not vary from what banks required pre-scheme). Managers should explore all options, but be aware that these facilities are unlikely to be long-lasting, nor cover the full extent of lost income.
5Litigation finance. A perhaps unfamiliar option, here businesses take funding from a third party to cover legal bills for pending litigation that otherwise might not proceed. Funding can be structured so that it is non-recourse i.e. it does not affect the company’s balance sheet. This method guarantees legal cases can go ahead without impacting cash flow or increasing liabilities. Only if a case is won does the funder take a cut of any winnings. There are few downsides for the borrower providing they ensure a reputable funder is used. Managers may seek to discuss such funding with their legal advisers.
Company leaders are today undoubtedly considering all the options available to them. While familiar levers will initially rise to the top of the list, thought should be given to those that firms may not yet have fully engaged with. Litigation funding is likely to be one of these. And with such funders in the UK having raised significant sums in recent years, support is likely to be available at both the speed and quantum that businesses need to fight legal battles. When considering all the options for immediate cash needs, managers should keep an eye on the longer term impact, in both financial and reputational terms.
Robert Hanna is co-founder of Augusta the UK’s largest litigation funder by case volume and oversees lead generation.
Robert has spent more than 20 years in the hedge fund industry, initially as Head of Sales for the International Equity Finance department of Merrill Lynch International based in London, then as Global Head of Marketing and Sales for the Equity Finance Department of Merrill Lynch, Pierce, Fenner & Smith in New York.
He subsequently co-founded Mako Investment Managers, a multi-hedge fund asset manager, acting as Chief Investment Officer. Robert holds an MBA from the Cranfield School of Management and an LLB (Hons).
