Are existing finance agreements starving you of cash?

PMD’s Director Tom Brown explores the options open to firms looking to utilise the Government’s Coronavirus Business Interruption Loan Scheme (CBILS) to refinance their existing finance agreements.

The extent of the UK Government’s coronavirus intervention schemes has been unprecedented. As of the end of Q3, funding extended by banks and independent lenders (backed by Government support) topped £100 billion. An eye watering amount.

Whilst the various support schemes have gone some way to preserving liquidity and keeping the wheels turning through the most challenging moments of the pandemic, many firms may not have considered how servicing their existing indebtedness (such as Hire Purchase (HP) / Lease Agreements) in addition to COVID loans will impact on their future viability. Particularly at a time when most lenders are now taking a much stricter approach to forbearance measures.

While some SME business owners may have struggled to access CBILS, nearly 60 percent of that £100 billion has been provided to businesses through the Bounce Back Loan Scheme. With repayments beginning to fall due in 2021, there’s a question on many business owners’ minds. Are current liquidity levels enough to weather the continued uncertainty?

Sectors such as construction, transport and manufacturing are asset intensive with most businesses having invested heavily in capital equipment such as vehicles, plant and machinery most probably financed at some time over varying lengths of repayment.

In the past firms could refinance assets over a longer term, releasing equity whilst settling existing agreements. Typically, interest rates were higher than the original agreements and fixed rate settlements were expensive. This generally means that the new deal did not represent good value. Although equity could be released it was at a price and normally only used in distress situations.

However, refinancing existing agreements can now qualify for CBILS support. These transactions are much more cost effective and better suited to a firm’s long-term recovery plans.

From our experience, some business leaders may be unaware that these charges can be offset within the P&L against taxable profits and that SMEs may be eligible for multiple CBILS facilities – one of which could be a refinancing facility.

As well as reducing monthly payments, refinancing your existing debt could release additional funds back into cash flow. Some funders also provide top up CBILS loans. These sit alongside refinance agreements, releasing even more crucial funds with the majority of these offering low start options.

Below is a recent case study of a CBILS Asset Refinance in practice:

Manufacturing – £750,000 Asset Refinance

  • The client was servicing £30,000 per month in HP debt, with their existing agreements being originally financed over a three year term
  • By refinancing assets, we were able to release an additional £100,000 of working capital
  • Given CBILS nature, there was a key benefit of capital only repayments within the first 12 months
  • We were able to reschedule the payment profile over a longer term than the original agreements
  • Ongoing monthly and annual debt service commitments had significant reduction, improving working capital reserves
  • The headline interest rate was cheaper than the existing debt

Now is the time to review, take stock and move forward.

Our team of experts are on hand to support your business.

If you are keen to assess your financing options before the application deadline, please do not hesitate to contact Tom Brown on 07793 242 280 or get in touch here.

For more information on the services and finance options that we provide, please click here. Alternatively, keep up to date on what we’re up to and for new opportunities within our growing team by following us on LinkedIn.

You might like...

How to exit your business via an MBO

February 9, 2023
A management buyout may be something on the cards for your business this year, so we’ve put together a short article on how to do just that.

The latest update on the Coronavirus Business Interruption Loan Scheme

April 17, 2020
The UK has reached its three week mark into the Coronavirus Business Interruption Loan Scheme (CBILS). But what we are seeing is not hugely optimistic news for the country.