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External providers of finance take comfort in robust numbers

Author: ICAEW Insights

Published: 24 Aug 2021

The chartered accountancy profession plays an intrinsic role in supporting the collection of information that underpins access to finance, especially for small and medium-sized businesses, writes David Petrie, ICAEW Head of Corporate Finance.

External providers of finance take comfort in robust numbers. They also back management teams able to demonstrate sound management of working capital. If the numbers are good and financial management is strong, it is likely there is a compelling business model capable of further growth and development.

It all starts with the basic principles. Herein lies an important aspect of the role of the profession – as information providers, be they members in business bringing rigour to the companies in which they operate, or members in practice advising clients. But let’s not underestimate this task, particularly in the light of the events that characterise the years 2020 and 2021.

From as early as January 2020, some businesses were suffering supply problems, especially if they were sourcing from China. This early warning gave those companies an indication of the potential severity of the pandemic to come and forced a reduction in output, but few others reacted. Government restrictions that followed in March switched off demand for entire sectors of the economy. Difficult decisions had to be made, and additional funding considered. That funding came largely from two sources: conventional commercial funding, and funding provided by or supported by the government, in the form of fiscal relief or monetary reliefs.

In the UK, banks made a huge effort throughout a very difficult period to support existing customers, through forbearance and renegotiation of existing loan facilities. Members tell us that in very many cases banks were content to defer repayments of the principal sum or roll up interest payments, especially for customers in the sectors hit hardest by the pandemic. This was a pragmatic response in that, for example, bank managers are not best placed to become the nation’s hoteliers or restaurateurs.

In addition, the banks became (and still are) intrinsic to the various loan schemes backed by the government. These were vital for many businesses who might have struggled to achieve funding at this time, and we cannot underestimate the value of the government guarantee. The British Business Bank highlighted in July 2021 that businesses across the UK have benefitted from a massive level of tax-payer backed support, comprising 1,670,939 government-guaranteed loans worth £79.3bn.

These loans helped support UK businesses’ cashflow during the crisis through schemes delivered by the British Business Bank. This includes 1,560,309 Bounce Back Loans worth £47.36bn, 109,877 loans worth £26.39bn through the Coronavirus Business Interruption Loan Scheme, and 753 loans worth £5.56bn through the Coronavirus Large Business Interruption Loan Scheme. New figures for the Bounce Back Loan Scheme Top-Ups reveal 106,660 loans have been approved worth £0.95bn.

Of course, the UK government has not been alone in supporting businesses throughout the pandemic. Governments around the world have put in place similar mechanisms to ensure economies bounce back and recovery is meaningful.

By far the most important source of funding for most businesses has been, and continues to be, the banks, be that to provide working capital, or to support expansion in some way. But some businesses have required additional funding, particularly if demand has grown sharply as a consequence of the pandemic. Technology businesses, healthcare, and some logistics businesses have traded at record levels, and many have sought additional debt and equity funding to support that growth.

We should not forget the role of members in practice – supported by ICAEW – who have provided advice to businesses in extraordinarily difficult circumstances. Advice has ranged from helping businesses in managing their working capital positions through to recapitalising the business for either growth or survival. We hope our most recent podcast, ‘Access to finance – supporting small businesses’, will provide inspiration to those seeking debt, equity and grant funding to supplement the highly engaging information we offer members in our Business Finance Guide.

We have now reached the stage where many more companies are thinking about how they can recapitalise their businesses, bring in new equity investors, or indeed take out loans to cover the short to medium term, as trading resumes. Chartered accountancy brings rigour and scrutiny to the numbers and the profession is there to advise or refer to specialists. We have already seen the value of good advice in the significantly lower than expected insolvency numbers published by the UK Insolvency Service. It is the expertise of the profession that will underpin recovery.

Going forward, we see companies fall broadly into two categories. The first is companies that attract investment relatively easily because they've developed a business model which works in the post-pandemic world. The second is companies that are still trying to adapt but may well need external funding along the way.

Any company – of whatever size – seeking to raise external funding may well wish to consider undertaking a statutory audit, even if it is not strictly required by the regulations. An audit demonstrates to external funders, be they banks or equity providers, that the company has robust systems of financial management and control in place. External providers of funding take comfort in robust numbers. And good cash balances are very attractive to any funder who is scrutinising a business model – pandemic or no pandemic.

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