Daily Coronavirus Webinar: What next for business finance?

Overview:

Today's webinar took the form of a conversation between the CBI’s own Chief Economist, Rain Newton-Smith; the COO of TheCityUK, Marcus Scott; and the CEO and Founder of Suade Labs, Diana Paredes. They alighted on a number of topics, including:

• The economic outlook
• Forthcoming deadlines
• New financing options for businesses
• No one-size-fits-all solution
• Regional risks.

The economic outlook

When asked for an update on the economy, Rain said that she’s been “looking for rays of hope – because that’s my disposition!” The main one she identified is that “the worst of the fall of output could be behind us now”. Surveys, including the Purchasing Managers’ Index, indicate that while activity fell in May, it fell at a slower rate than it did in April.

However, this doesn’t mean that the economy will bounce back swiftly. Rain is still anticipating a recovery that’s less V-shaped and more shaped like a Nike swoosh, with an elongated climb back to previous levels of output. Indeed, she went on to highlight the worrying fact that, for businesses who haven’t stopped trading, 42% have cash reserves to last just six months – or less.

As Rain put it, “We know we’re not out of the woods yet. The next three to six months are going to be really challenging for a lot of businesses.”

Forthcoming deadlines

The challenges include a series of forthcoming deadlines. One of these is tomorrow, 10 June. Under the government’s new Job Retention Scheme (JRS) provisions, an employee needs to have completed a three-week furlough by 30 June in order to remain eligible for any form of furlough from July onwards. This means that tomorrow is that last date for someone to start a furlough for the first time.

And Marcus highlighted some other forthcoming deadlines. One of these is the end of the JRS. Although he acknowledged that the Treasury has now permitted the “sensible option” of flexible furloughs, it remains the case that some businesses may struggle to balance their staffing needs and costs in the months ahead – particularly where demand and supply have been especially affected.

“The next challenge,” said Marcus, is what he describes as the “Month 13 issues”. This is the time, around next spring, when businesses could face one bill after another: “they’re got to start paying back VAT which they deferred… rent arrears… paying back loans.” And all that after months and months of what are likely to be low revenues.

New financing options

As it happens, Marcus and TheCityUK have produced a report that puts a number on some of the pressures that businesses will be under next year – they estimate that there could be between £97bn and £107bn of unsustainable debt by March 2021, a third of which comes from the business interruption loans.

What can be done to lighten this tremendous burden? This was the main subject of the discussion – and various ideas were put forward. These included: linking debts to future tax liabilities, so that repayments only begin when a business is profitable again; providing grants to particular businesses and industries; or perhaps even returning to older funding models, such as the Industrial and Commercial Finance Corporation, which was set up after the Second World Way to provide money to SMEs (and later became 3i).

Diana acknowledged the fortunate position of her own company – a start-up that provides financial regulation software and that has been able to generate revenues relatively quickly, “so we haven’t really had to fundraise”. But she did also advise that, even for companies who are understandably reliant on funding, now is still a time to focus on revenues. “Existing deals, existing customers are what companies can hold on to.”

No one-size-fits-all solution

Diana also emphasised that, when it comes to support measures, there is no “cookie-cutter prescription”. Marcus echoed this by calling for a “toolkit” of different funding options. There is, he said, “no silver bullet”; different businesses will have different requirements.

In fact, Marcus went on to describe a spectrum of different businesses and their different requirements. At one end are the very largest companies in the UK – which haven’t had too much trouble raising new funds over the past few months. At the other end are the very smallest businesses – for which Marcus suggested the “student loan”-style mechanism of debt that’s paid back in line with profits or revenues.

It’s the middle – “250,000 SMEs… which employ the largest chunk of people in the UK” – that may be the most difficult territory. Traditionally, these companies can find themselves “losing control to the people putting in the finance”. Marcus, in conjunction with business groups like the CBI, is currently working to find methods of additional financing for these companies while also “helping [them] to retain ownership”.

Regional risks

There is a regional dimension to the funding question. Because of the concentration of financial services in London, as well as other factors, a lot of transactions are also concentrated in the capital. According to Marcus, about 80% of the value of all deals is accounted for by London, or about half by volume.

Diana said that these sorts of concentrations can be beneficial: “That’s part of the success of Silicon Valley… entrepreneurs talking to each other and thinking about things together.” But she also emphasised that a larger ecosystem is necessary: “It’s beneficial to all to have a much broader pool of talent.”

This suggests that, whatever support mechanisms are introduced, they need to be available – just as conveniently – outside of London. As Rain warned, it’s currently “much harder if you’re in Coventry or a start-up in Cumbria”.

Key questions we answered:

1. Rain, can you give us an update on some of the latest economic data?

• No sector has escaped the fallout from this crisis.
• The May Purchasing Managers Index (PMI) indicated a sharp fall in activity. Though this was at a slower pace of decline than April – suggesting the decline could be bottoming out. However, the CBI Growth Indicator suggested that activity fell at the fastest pace since the Indicator began (in 2003) in the three months to May.
• An Office for National Statistics (ONS) survey reported that 42% of respondents only had enough cash reserves to less than six months.
• As of 31 May, £32.3 billion has been lent across the three access to finance schemes.
  • £21.29bn via the Bounce Back Loan Scheme (BBLS)
  • £8.9bn via the Coronavirus Business Interruption Loan Scheme (CBILS)
  • £1.1bn via the Coronavirus Large Business Interruption Loan Scheme.
• But there are two pressing issues where progress is needed:
  • The CLBILS approval rate is hovering at around 30%
  • Non-bank and fintech lenders – which support around 30% of SME businesses – don’t have access to the capital needed to lend.
• One of the biggest challenges in the next phase of recovery will be how we best assist those otherwise healthy companies who are now holding too much debt. To give you an idea of the scale of this challenge, TheCityUK estimates there could be between £97bn and £107bn of unsustainable debt by March 2021.

2. Rain, what sort of ‘shape’ do you think the recession will follow now? When do you think we will recover?

• I don't think we're going to bounce back from this unaffected.
• I think the real concerns are about scarring in the labour market. What happens to the young people who will be looking for a job in September or October?
• But I think the data is tentatively showing that we’re starting to come out of the bottom.
• I think we're now in the second phase of a readjustment. And that’s where we want to make sure that we're building back better. We'll need the Treasury to support the labour market, and we'll need to see more support for sectors and SMEs that are going to really struggle.

3. Rain, what’s the CBI doing on debt and financial sustainability, and how are you supporting businesses?

• The CBI is feeding into a variety of working groups. For example, I am a member of the TheCityUK End User Group.
• There’s no one silver bullet. There needs to be a range of solutions to meet different businesses’ needs:
  • For example, a student loan style repayment vehicle would work well for small businesses. You’d start paying it back only once you are making a profit again.
  • For larger SMEs and mid-tier corporates, an equity vehicle to provide convertible debt for equity loans would work well.
• But before these schemes are agreed, there are some key steps that are needed to ensure we ‘build back better’.
  • Ensure competition in the financial sector drive innovations and quality of service
  • Ensure lending supports sustainable finance and growth
  • Ensure we build a more resilient and sustainable system.

4. Marcus, can you run us through some of your findings from your UK interim report?

• We wanted to explore the risk of loans that had been lent to companies during this crisis – namely companies who went into the crisis with an economically viable business, but because of the amount of debt they’ve taken on, they might become non-viable.
• We've always had a very strong network of high street banks who provide the majority of the finance. But these banks provide debt and not equity, and most companies need a combination of debt and equity to finance their business.
• I think this crisis has proved is that having more equity and capital is a good idea to weather any storms that might come.
• We can roughly split this up into three sections:
  • Companies which are quoted on some kind of public market – there are around 1,500 of these businesses, and for these, the market's doing pretty well. Over £10bn has been raised since the beginning of the crisis – and there's all sorts of measures which these companies can use to raise money
  • SMEs, micro businesses and sole traders – we have around 5.5m of these in the UK, and these are the very smallest companies which are probably normally only employ one or two, possibly even three people. Those companies are going to need solutions like the student loan type scheme Rain mentioned
  • Medium-sized businesses – there are around 250,000 of these, but between them they employ probably the largest chunk of people in the UK. And these are the kind of companies we would like to help.
• Traditionally, these companies find themselves losing or ceding control of the company to the people who are putting in the finance to refinance that company. What we're trying to do is help those companies to retain ownership while providing them with some additional financing and capital.

5. Diana, what have you learned about how to grow and finance a company like yours?

• We make regulatory software for the financial industry – so our clients are typically banks and asset managers.
• Our software means we were able to generate revenue quite quickly from our customers – so we haven't really had to raise funds.
• When we first started, we really focused on revenue generation rather than raising funds. And this has paid off in this crisis because it’s meant we have a very sustainable business.
• We're trying to create a business that is sustainable and doesn't have external dependencies.

6. Marcus, what were the regional differences in your report?

• Just under 80% of the deal value happens for companies in London, and London also accounts for around 50% of the number of deals.
• There's a concentration of head offices of financial services companies in London. So, if you want to set up a business around financial services, it makes sense to set up somewhere near to those so that you can be near your customers.
• That said, when it gets to the point where all of the financing for the UK is concentrated in London, that then becomes a negative. However, there are groups of investors that are spread around the UK.