Cash through COVID
The COVID pandemic has highlighted the importance of access to finance for businesses and how relying solely on working capital inflows may not be enough in trickier trading times.
To their credit, the Government acted quickly and decisively in funding schemes and backing loans to support businesses, writes Ned Brown, Manager at PEM Corporate Finance.
However, this speed along with a lack of clarity caused a backlog of applications at the major high street banks who hadn’t the time to put the correct systems in place.
This led to cash strapped businesses looking elsewhere for finance. Luckily, there is still large liquidity in the market, and at low interest rates. So, what else is out there?
There’s a raft of alternative lenders in the market, offering quick and relatively simple access to finance for SMEs. There are specialist asset backed lenders, cash flow lenders, invoice discount specialists. The list goes on and it is often tricky to navigate.
They typically offer debt finance at a higher coupon rate than the high street banks. Many have now been accredited to provide the Government-backed loans and are certainly a viable and credible alternative to the high street banks.
Most of these funds are closed end, meaning that they need to deploy and return capital in a fixed period, usually 8 to 10 years. Often, the quicker they can deploy and return capital the better the IRR for the fund and its investors.
Private equity funds are sitting on huge amounts of undeployed capital. This is beneficial to businesses as they’re under pressure to make investments and are looking at different ways of deploying this capital.
Typically, private equity firms look for businesses making more than £1m EBITDA. We’ve seen this threshold being lowered for stand out businesses in attractive sectors.
There is huge flexibility of investment structuring whether it be a minority or majority equity investment using high coupon loan notes. We are also increasingly seeing variable structures designed to deal with the uncertainties of trading through COVID and Brexit.
This money can be seen as ‘expensive’ but private equity investors are very much aligned with business owners in making the business prosper, and to see an attractive return on its capital.
So, there may be operational and strategic advantages in partnering with the right investor.
In summary, there are a wide range of funding options for businesses in the current market. The difficulty is navigating the market and finding the best and most suitable option for the business.
• You can call Ned Brown on 01223 728222 or email ned [at] pemcf.com (ned [at] pemcf.com )