In the immediate aftermath of COVID-19, businesses looked to improve their cash flow management and focus on day-to-day survival, leaning heavily on government support packages. But longer-term, businesses will need greater liquidity as they move to financial self-sufficiency after governments scale back support. They will need to invest in adjusting to the changes, to sustain operations and stay competitive. Raising finance to do so will be essential.
According to Grant Thornton's latest IBR data, 26.1% of mid-market businesses have spoken to or planned to talk to lenders about new credit, while 23.4% of global respondents said they'd either sought financial support from investors or are planning to seek support. Significantly, 46% of businesses identified a shortage of finance as a constraint on growth, up markedly from 37% in H2 2019.
Despite these concerns, there are pools of finance available for well-run businesses. Unlike the global financial crisis of 2008, there are many institutions currently sitting on cash.
Paul Gooley, partner and national head of corporate finance, at Grant Thornton Australia, says: "From an investors perspective, people need to put their money somewhere. Return figures in banks are negligible; the cash market is like putting money under the bed. So private equity and debt funds offer yields above inflation, there are pools of money that are looking for returns."
Continually assess what future liquidity you might need
Governments have generally supported businesses financially throughout the crisis. Tony Markwell, national managing partner private advisory at Grant Thornton Australia, says: "A lot of governments have given employers money to keep people on their books and that means a lot of businesses are reasonably liquid."
The issue for many, however, will be when those support packages retreat and when businesses need to start making investments; upgrades and fundamental changes to their business models to adjust to the new operational environment. Markwell says: "You need to have a good look at your liquidity, is it sufficient to get you through another wave, lockdown or a slowdown?"
Pallavi Bakhru, chartered accountant at Grant Thornton India in New Delhi, says: "People want to hold onto their cash. In fact, in India, people have gone and raised more money through rights issues from shareholders. They've gone and got more limits sanctioned, not they've necessarily drawn on them, but they want the comfort of knowing that if needed, if business demands, this line of credit is available to them."
Businesses are looking at money for many different reasons, "Some are looking for money for R&D and technology. And some are just looking for basic working capital because they've got their money stuck in debtors, the money's not coming from their customers, or if they need to kickstart production, they need working capital. So there is a money requirement for different gestation periods."
Understand what banks are looking for
Banks are being supportive of their existing clients, but most are tightening new lending conditions. Gooley says: "It's one thing to provide waivers of covenants or an extension on facility due dates, but it's another if bank clients need new money. Banks will go risk-off, and the amount of capital that banks provide will reduce. The willingness of banks to provide cash flow lending is likely to disappear."
While conditions for bank lending are tightening, it is still the cheapest option so, as Markwell says, being a good bank customer, has never been more important for businesses. Markwell says: "Banks want to deal with people who are a pleasure to lend to. They don't like businesses that are short on collateral, short of explanations for missing budget, short of business plans."
"Having a banker who understands your business, knows where you're going, knows your critical reasons for being and what your business model is about is key. They love lending to people who are in control, who do what they say they're going to do, and who can articulate their plan."
Consider the range of alternative finance options
In the private market, there is a whole range of different providers outside the banks. Gooley says: "If your bank says no, it does not mean you're out of options."
"Private equity is still sitting on dry-powder and some regions are more active than others. There are also credit funds, family office for high-net-worth individuals, neo banks and fintech who have raised capital and who are able to play in that alternative debt market above where traditional banks would play."
"There are large pools of money out there in the hybrid space, high yield debt, or that debt plus little bit of equity kicker, which are available for mid-market companies to access, particularly high-quality ones. They can be a more attractive option than raising further equity, and a lot of companies just aren't aware that that money is out there."
Carlos Ferreira, US national managing partner for private equity, Grant Thornton, says: "Tech-enabled businesses, especially those in the US and target markets as diverse as Israel and Brazil, that are addressing cybersecurity for remote working, online training and education, telehealth, e-commerce, pharmaceuticals, food-tech and distribution and delivery, are all on the radar of private equity houses.
"These businesses are thriving, and alongside their private equity backers are looking for opportunities to reinvest through leverage while interest rates are low."
Private equity in the mid-market: reshaping strategies for 2021
Prepare balance sheets and have a good future story to tell
Preparation is key to raising finance, but successful applicants will also have a compelling vision for growth in a new business environment.
Gooley says: "It will be a race as to who has the best story and who has the best business case. We're encouraging people to get ready and make sure you have a well-articulated story, particularly on what does it look like in the next couple of years as you come out of COVID.
There will be opportunities to fund across the market, and these providers will have the choice as to where to put their money. Being prepared for that and seeing how the market will level out for you – and how you will service the debt you're going to ask for – will be critical."
Businesses that are working on their resilience and recovery plans are identifying the market opportunities and their accompanying investment requirement. Smart businesses are moving ahead of the pack by getting their balance sheets ready to take advantage of the situation. Having a robust story about how you are going to adapt to the new paradigms and where the demand is going to be will help you stand apart.
Thriving in 2020: Capitalising on resilience
Finance can be a lubricant for business – it ensures all the parts run smoothly and in harmony to drive it forward. Getting the right liquidity for your business’s future is essential to ensuring to staying on track and ahead of the competition.
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Take a pit stop
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