Although we have seen changes caused or accelerated by the pandemic, we cannot yet know the full extent of the longer-term impacts. Business models and their revenue streams within sectors such as retail have changed, for example, with many brands putting greater emphasis on shifting operations online.
Traditionally, business models and lenders value certainty, looking at past performance for indications of future performance and security. When that certainty no longer exists, there is scope for a different approach.
Commercial benefits of engaging early
Too often, we see businesses either burying their heads in the sand rather than tackling issues that may be bubbling below the surface, or responding to lenders' offers to engage with them without being properly advised. Turning a blind eye and then 'firefighting' subsequent issues, rather than seeking advice on its overall position, leaves a business commercially and legally vulnerable. Engaging without taking proper advice has the same outcome, and also allows a lender to look 'under the bonnet' of the business, thereby potentially identifying weaknesses, possible leverage and any technical breaches. Those breaches then open the door to mandatory consequences and 'solutions' which are not always the best for the business.
All of this can be avoided by engaging with advisers to understand the business's position under the finance and security documents, including identifying any commercial vulnerabilities and possible improvements. As a result, a business would enjoy an informed view when it enters into commercial discussions, whether directly with lenders or via advisers. Whilst a patchwork of solutions means wasted business costs, lost opportunities and increased business costs, a strategic review can not only build the resilience to avoid adverse situations and costs in the future but also help a business to prioritise and streamline its processes and investment in infrastructure. Engaging early and often with the right independent advisers leads to long term savings.
An era of opportunity
The global changes mean that traditional approaches and template terms are no longer fit for purpose. 'Agile' is the new buzzword, not 'certainty'.
For any relationship between a business and its lender(s) to be successful, there needs to be a willingness to consider the new commercial reality. This is an opportunity to review the business's arrangements to the benefit of both the business and the lender. Businesses should view the changes in the landscape and relationship dynamics as a chance to control more of the narrative in discussions with lenders, and tailor financing to the business's current needs and future plans. This will then benefit both parties. Indeed, for a lender to realise the maximum return on its investment, the borrower business needs to thrive.
Reviewing financial arrangements with lenders is also a commercial opportunity to add value to the business and/or unlock existing value.
Questions that advisers can pose of businesses for internal consideration include:
- Are the current financing arrangements the most suitable for the business?
- Is the business maximising the potential benefit of the current facilities?
- What are the risks to the facility to be aware of and to guard against?
Properly advised businesses will be best placed to answer these questions and open a dialogue with its lender.
Engaging in a review exercise will also build resilience and lender goodwill as we face continual changes. Understanding lender and borrower rights in finance and security documents and enforcement processes allows the business to avoid mistakes and potentially resist the enforcement of security. This is good news for the lender too – generally the last resort for recovering lending and the least time- and cost-efficient option.
Act now to avoid disputes later
Disputes and litigation tend to arise because the circumstances upon which the contractual and commercial framework for a relationship was initially built has changed - and those changes have not been foreseen. By being proactive in developing understanding and expectations, and by taking a commercial approach to agree on 'a new set of rules', expensive and damaging disputes may be avoided.