In business, the only constant is change

By freshthinkingcapital

Posted on 15th October 2019

Annabel Todd, our Regional Sales Director, North West & National, was asked to speak to members of the Turnaround Management Association about key changes and their impact on corporate insolvencies.

 

Addressing the TMA, Annabel gave an outline of the HMRC’s proposed change to preferential creditor status in 2020. She examined the effects on asset-based lending in the SME market, and also gave an overview of the SME lending market. The following is an executive summary of the talk.

 

About the change

In his Autumn Budget, Chancellor Philip Hammond announced that starting April 2020, HMRC will assume preferential creditor status. Meaning, in the case of insolvency, HMRC will no longer be classed as an unsecured creditor – taking them from fourth to second in the pecking order.

 

The ranking in insolvency is:

  1. Secured creditors with a fixed charge
  2. Preferential creditors
  3. Secured creditors with a floating charge
  4. Unsecured creditors
  5. Shareholders

 

What this means for SMEs

Banks that depend on a floating charge as security (such as a debenture to support an overdraft) will be reassessing loans and lending facilities. This could lead to reduced facilities, requirement for additional security and higher cost to reflect the levels of risk. It’s a development that is likely to result in the need for further monitoring and reporting too.

 

Asset-based lending facilities are likely to be affected, with a greater effect on larger corporates, especially retailers. Those SMEs using an ABL facility with a stock facility are likely to have further reserves implemented by their bank/lender to deduct the potential VAT, PAYE and NI liability and accrue for these liabilities within the facility, restricting the amount available to draw from the facility.

 

Shortfalls in working capital

All of the above has the potential to create challenges for business. That’s because planned investment on the back of ABL facilities, or facilities which may be reviewed, could be delayed. This reduction in working capital would restrict an SME’s ability to react to and make the most of any opportunities they would normally pursue.

 

How we can help

At Fresh Thinking Capital, we will be working with SMEs to help with any working capital shortfalls that may occur. Should a bank be looking to reduce its risk, we are here to support them, asset-based lenders and any other funders, with an additional facility.

We are also here to provide support should any planned investment, affecting the availability of credit from their main bank, be delayed.

 

Overview of the market

 

Brexit belt-tightening

Talk of Brexit and its potential effects on the economy continues to rumble on. The lack of certainty this creates is slowing down planned investment. However, while the appetite throughout the lending market has been lessening, we at Fresh Thinking Capital are as hungry as ever.

 

Personally guaranteed debt

Examining the current level of personally guaranteed debt amongst SMEs is eye-opening. The waiver that bypasses limited liability status for directors of a limited company when borrowing is now being called upon quite aggressively, putting added pressure on business owners and directors.

 

Peer-to-peer lending

Issues in the peer-to-peer lending world are starting to become apparent. The failure of Lendy being a headline case in point. The length of time for investors pulling money out is increasing substantially when compared to 12 months ago, as the secondary market remains slow.

 

That concludes this executive summary. As ever, we at Fresh Thinking Capital are here to help you grow your business. Talk to us about getting our expertise working for you today.