Banking and Business during COVID-19
Key Contact: Christian Farrow
Author: Chiara Howfield
News from the ground
With predictions that the UK will enter into a recession, certain institutional banks such as NatWest, Barclays and Santander have agreed to suspend payments to shareholders with a view of freeing up billions of pounds worth of cash.
The steps taken by the banks to weather the financial implications of the Covid-19 outbreak will help support lending in the economy and help mitigate against future financial difficulty. Business Secretary, Alok Sharma announced yesterday evening that it will be unacceptable for banks to refuse to lend money to good businesses in financial difficulty.
With an increase in new funding requests, we can expect banks to assess and rely on past financial performance (particularly 2019 financials) of businesses to determine whether financial difficulty and the need for funding is due to Covid-19. The level of risk taken by businesses to ensure that risk is appropriately shared and managed will be key in the coming months. Banks will be looking at the amount of collateral put forward by business owners and shareholders, fundraising opportunities and business support on a supplier / customer level. However, applications for new funding could take a minimum of 2/3 weeks before businesses receive funds as banks will scrutinise past performance and projections, and may require personal guarantees and security to protect their interest.
For businesses with existing facilities, banks may be willing to consider capital repayment holidays and covenant waivers for the next 3-6 months. For both new and existing facilities, there will be a stronger focus on business projections and the level of risk i.e. a review of the measures proposed for an expected downturn. There will be a review of how businesses have projected to deal with government initiatives. For example, where tax has been deferred have businesses factored in future payment and downside risks or, in the case of schemes such as the Coronavirus Job Retention Scheme, are businesses using it to help with a downturn in business as oppose to applying it to those who only fall in the vulnerable category? These are all factors to be taken into consideration. However, that is not to say that government initiatives are the best solution or even a solution at all for all businesses. For example, some funding schemes do not currently help businesses with turnovers between £45-£200 million – it is hoped that this will be addressed by the government.
The Chancellor, Rishi Sunak is expected to announce more measures in the coming days. It is expected that some of these measures will include changes to the insolvency laws and perhaps even a review of the funding schemes for businesses who fall short of some of the government schemes and initiatives in place.
For more information on any of the points raised, please contact our corporate team.