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Mishcon Academy: Digital Sessions – Sources of Funding

Posted on 17 June 2020

Mishcon Academy: Digital Sessions are a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

This live session was held on 11 June 2020. The information in the film is correct at the time of recording.*

Please see here for our summary of the key schemes available to support your business. We've included a brief description, eligibility criteria, availability date and application information. While the table lists Government support for businesses, there are other ways of managing the financial impact of the COVID-19 pandemic on your business. We would be delighted to chat through your circumstances and the potential solutions available.

*Unfortunately technology was somewhat against us during the recording of this event so please excuse any dip in quality. If you have any questions regarding the content, please get in touch with one of the panellists from this session.

The main sources of funding available to businesses to alleviate the pressure caused by COVID-19

Chaired by

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

Good afternoon everybody my name is Ross Bryans, I am the corporate partner at Mishcon de Reya and today is of our digital academy sessions on raising finance during Covid times.  I am going to be joined today by some of my colleagues on taxation, we’ve got Gary Richards for private equity, I’ve got Andrew Rimmington joining and we have Sarah Spurling speaking on all things banking and finance.  It’s a critical topic at any time of the year and of course especially so during the cash flow and working capital crunches that everybody is facing.  We know that some 35 billion of Government funding has been lent to date into three of the key Government loan scheme; the bounce back loan, the Coronavirus business interruption loan scheme and the large business interruption loan scheme.  But not everybody can access those schemes.  We also know that over the next three months companies are going to face a cash flow crunch because the furlough scheme will be coming to an end in about three months and also businesses will be looking to re-open so in this talk we are going to look at different sources of funding, we are also going to look at the Government schemes including the grants and rebates and loan scheme but before we get there what I do want to do is start with looking at some ideas as how to reserve cash and protect working capital.  At this point I want to bring in Gary and speak to you about your thoughts on time to pay agreements and other ways maybe to have a dialogue with HMRC which can help in these times.

Gary Richards, Partner, Corporate

Mishcon de Reya

The first thing to think about is the time to pay scheme, essentially you ring up HMRC and you put forward a case as to why you will be able to pay the tax but not all yet or not as quickly as they would like and if they are convinced they will probably agree a plan with you to pay the tax.  The other thing is a really practical point to do with corporation tax.  Companies pay tax by reference to accounting periods.  If you are going to have a lot of tax to pay in a few months’ time and your accounting period ends, I don’t know, 30 April, if you instead closed your accounting period, I don’t know, end of October you’d have tax to pay a bit sooner but on a much shorter period and the rest of your fore shortened accounting period the tax would be payable quite a lot later.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

So in terms of other ideas, Sarah, what have we got?  If you are out there and you are trying to avoid taking a loan, what can you do with your banks?

Sarah Spurling, Legal Director, Real Estate

Mishcon de Reya

Most businesses will already have instinctively gone back and had a look at their existing financings to see what they can do, what they need by way of concessions, accommodations.  The good news is that most lenders are showing themselves to be reasonably supportive of their existing customers.  Another thing that you can look at is a debt equity swap which is perhaps more traditionally in a kind of group context but it is possible for a third party finance provider to decide to convert their debts’ equity.  And then in terms of cash flow you might want to look at looking at the assets within the business that might be available for leveraging and a classic example would be factoring and in that situation you can go to a factor, technically the lender who will provide up front funding typically around 80% of the value of the invoice on the date that the invoice is issued.  It means that you can use that invoice to get cash in at an earlier stage and obviously that cash can be used to keep the business going.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

Alright so having considered ways to preserve working capital and protect cash, turning to the Government funding schemes, there are various which are grants and rebates as opposed to loans and in that respect, what schemes have we got out there Andrew?

Andrew Rimmington, Partner, Corporate

Mishcon de Reya

There’s the small business grant fund if you occupy premises and the rateable value is less than £15,000 you should automatically be eligible for a grant of £10,000 from the Local Authority.  Likewise in the hospitality retail sector there is a similar fund available of up to £25,000 that again is linked to the rateable value.  We are encouraging clients to make sure that they’ve looked at all of the grant funding options before looking at whether the business interruption loan scheme etcetera is available as it is not.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

So along this line of Government schemes there is obviously the future fund and I wanted to raise the future fund as a concept and the future fund is a matching scheme whereby the Government will put up 50% of what you will get from a private investor up to £5 million.  That really is only appropriate for high growth companies.  Andrew, if I can come back to you briefly just to what extent is private equity a realistic option right now?

Andrew Rimmington, Partner, Corporate

Mishcon de Reya

Equity is a very scarce commodity and given away you know, as a last resort and therefore to the extent there are business interruption loans available make sure that you have exhausted those first and I think probably Sarah it is probably worthwhile you just talking very briefly on the SME scheme and the large company scheme.

Sarah Spurling, Legal Director, Real Estate

Mishcon de Reya

The two business interruption schemes of business loans, overdrafts, invoice finance or asset finance.  The Government provides the 80% guarantee and for smaller loans will cover the first year of interest and fees.  The business needs to be able to provide evidence that it has been negatively affected by the Coronavirus pandemic, generally speaking they can’t have been a business in difficulty and they have to derive more than 50% of their income from trading activity.  In the guidance for the loans between Government and lender it is made very, very clear that the lenders are the ones responsible for making the judgment.  Most importantly the lenders have to look at the business and the loan proposal and conclude that but for Covid this would be a viable business and so it is really important when you are applying for those kind of loans to make sure that short, medium, long-term business plan is there and stacks up and is presented well.  From what we have been told by lenders, one of the huge problems that’s facing the scheme as a whole is the sheer volume of applications that have been received.  For the smaller of the two schemes something like £9 billion has been advanced so far, that’s around half of the 90,000 applications that have gone in.  For the larger one it’s more like £1 billion and about 190 successful claims.  So that gives you some sort of idea of the scale of what’s there.  It is perhaps not that surprising that the businesses that are able to put forward a very, very strong case are the ones that are going through a bit more quickly.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

On Mishcon’s website in its Covid page there is a checklist of all the Government funded grants, rebates, loan schemes which is updated quite regularly to pick up all of this.  So moving away from the Government schemes and then again moving back into what else is out there, what other options might people have, the concept of sale and lease back potentially has its popularity in times of need?

Sarah Spurling, Legal Director, Real Estate

Mishcon de Reya

It is certainly an option for a business that owns its own offices to look at doing a sale and lease back to try and get some of the equity out of that property, the business sells the property that they own to a willing investor, they remain in control of it, in control of their property expenses but they have the benefit of obviously getting the liquidity from their sale of the property.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

Bringing them a slight public company side to it is the so far untested I believe IPSX, the International Property Stock Exchange.  If you have a property or investment grade value which I believe is £15 million or more at a single geographic location so say a football stadium or a large office building, the idea is you drop that into a new propco and you list the propco.  You’ve also got the concept of peer-to-peer which in terms of companies that have spare cash, lending that money to companies that don’t have the cash but have you guys come across this or people asking you about this?

Andrew Rimmington, Partner, Corporate

Mishcon de Reya

In spike of all the doom and gloom in the media, founders are continuing to raise money in company private equity and image capital to make investments. You should have a dedicated Covid-19 story.  Showing potential no longer gets you a seat at the table.  If you can show resilience in spite of Covid-19 then from an investor perspective you are far more resilient in terms of process.  In any time of recession what use is the valuations take a dip as a result.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

Gary, if I bring you in there, there is also the concept of inheritance and wealth transfer.  It can be tax efficient to actually take some of your inheritance earlier?

Gary Richards, Partner, Corporate

Mishcon de Reya

The point we are making about inheritance tax is just a really simple point that if you’ve got parents who perhaps because of Covid are reminded or mortality is it now the opportunity to pass on funds whether by way of an equity investment, possibly by way of a loan on favourable terms because if they survive long enough under current inheritance tax rules, the cash moves out of one generation essentially into another.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

There is also the concept of mini bonds which can get a pretty bad press because the mini bonds don’t go well then there is people who are left out of pocket.  The concept of mini bonds is an interesting one.  Again it is a version of crowd funding and there is many different versions of that.

Andrew Rimmington, Partner, Corporate

Mishcon de Reya

If you come to a decision that you are going to need to look at third party capital raising, being realistic about pricing but also you know, target the raise.  Is this generally a bridge round?  Are we talking about a growth round if you are in the fortunate category where you are the kind of business that is continuing to generate increased revenues in spite of Covid then don’t just take the first person that offers cash, go for smart capital and you know, be very careful about giving away dilution.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

In a longer-term view there are apparently 300 incubators and accelerators scattered across the UK.  MDR has its own law tech incubator MDR Labs and if you go to the British Business Bank it splits its website into start-ups, scale-ups and stay-ahead and it’s got a finance hub and it has an interactive finance finder tool where you can put in your location and the stage of finance you are at and it will give you a drop down list of you know, a couple of hundred potentially finance providers who might be suitable for you.  There is also on the UK Gov website there is a finance support page.  One of the things I also wanted to mention was the concept of patient capital and the British growth fund as a kind of primary example of this and the British growth fund was borne in 2011 off the back of the last financial crisis.  It takes a minority state and it doesn’t go through funding rounds which give a pressure for exits.  It has invested in over 300 companies and £2 billion pounds since 2011 and they will co-invest alongside private equities.  With that, Sarah on asset backed lending there are also the possibility of maybe releasing the equipment that you’ve got and borrowing against that?

Sarah Spurling, Legal Director, Real Estate

Mishcon de Reya

Lots of businesses in the manufacturing sector rely quite heavily on that because they can have really significant valuable plant and machinery that they need for their business and if they can use that as an asset against which to raise finance it enables them to sort of improve their liquidity.  You tend to find that ABL lenders will be slightly more willing to lend into a business that might be potentially in financial difficulties than a traditional lender.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

And so I wanted to invite final thoughts.

Gary Richards, Partner, Corporate

Mishcon de Reya

From a tax perspective is think very carefully about the terms of any particular equity you are going to issue now as to is it going to prejudice someone’s whose previously had tax relief and will that equity raised now have an implication on how much you can raise in the future.  Some of these tax schemes of the Government are really quite tight to get into.  Covid has been expensive and continues to be very expensive for the Government.  One of the things we need to bear in mind is some of the tax rules we are used to at the moment, I just don’t know whether they are going to survive longer term whilst the Government rebuilds the public finances.  If you have got any big tax assumptions  underlying your growth model you need to think how realistic those rules continuing to exist will be.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

There is a sense that a lot of the debt is going to be converted into some kind of equity and there is conversations going on around will there be a new 3i because of course 3i was borne out of World War 2 because it was a de-centralised local venture capital Government backed fund and we may need something similar again.

Sarah Spurling, Legal Director, Real Estate

Mishcon de Reya

In terms of from my perspective, through recent months we’ve had a number of lenders challenge a bank’s bridge finances being very clear that they are still open for business to maximise chances.  I think it is really you know, what we are stressing is the importance of doing proper due diligence and understanding what you need and matching that to the lender’s that you are approaching for their risk appetite to their funding behind the scenes and then understanding that it you know, it is just inevitably going to cost more in the current climate and it is going to take a bit longer.

Andrew Rimmington, Partner, Corporate

Mishcon de Reya

Historic timetable league times from the date of the first contact with a potential source of funding and the date when the funding actually arrives is inevitably going to be longer so definitely encourage people to think about what happens when the money runs out and not wait for it to run out before asking the question.

Ross Bryson, Partner, Corporate

Mishcon de Reya LLP

Well look, times up so thank you to Andrew, Gary and Sarah for joining in.  Otherwise thank you to all the attendees for listening in and stay safe.  Goodbye.

Mishcon Academy Digital Sessions

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