Funding the Future: unlocking capital to power the growth we need12:00 am - 1:00 pm
COVID-19 – a crisis apart
As the economic fall-out from COVID-19 bites, John Swarbrick, Head of Portfolio at BGF considers what management teams can do to navigate the here and now.
I cannot remember a more turbulent period for small and mid-sized companies than the past two months. The early 1980s recession, the 2008 financial crisis and its aftermath, and more recently Brexit – all resulted from structural and largely supply-side challenges.
This pandemic however has touched on all areas of economic activity and created an unprecedented seizing up of both supply and demand. There is no doubt that the immediate shock has been intense and has escalated rapidly, placing unprecedented strain on businesses of all shapes and sizes.
Yet, most of the emergency responses I’ve seen from SMEs have been delivered with efficacy, precision and compassion – highlighting the resilience that lies at the heart of entrepreneurialism.
Businesses have been quick to keep their people safe, adapt operational processes where possible and are working through furlough and other grant and relief schemes to maximise resilience. These are promising signs. However, in order to address fully longer-term economic and business recovery in the UK, it is equally important to acknowledge that we are a long way from coming out of the storm.
As unwelcome as that will sound to those companies that have already dug so deep, we need now to brace ourselves for the cumulative impact of the lock-down which is likely to be long term and widespread. I think that many SMEs will face even bigger challenges when they start to come out of the lock-down even if that is reasonably soon.
Making too many assumptions about what the recovery will look like is unhelpful and premature. But for management teams considering their next steps, there are some general considerations worth reflecting on.
Address the here and now, but have options
During a crisis, decision making is always based on imperfect information and predicting how customers and suppliers are going to behave post-Covid is like throwing darts in the dark. At BGF, our Board-level conversations with management teams are focused on ‘playing what’s in front of us’ while keeping abreast of all options.
This is significantly more important than spending much needed cash on technical analysis or consultancy. While ordinarily it’s good practice to plan ahead, we’re in extraordinary times and becoming too obsessed with scenario planning or forecasting can eat away at time and energy.
It is simply too early for that. So, don’t do ‘nothing’ but don’t try to do ‘everything’ either. A middle ground is needed to keep moving the business forward. The most important thing is to know what the levers are within a business that can be pulled to make changes, make sure they are available and to be ready to pull them at the right time.
It is critical that management teams think about preserving options for the future – even if you don’t think measures like CBILS are relevant to you today, know everything you can about the scheme and what might be available in case this proves helpful later down the line.
Avoid short-termism, and use your Board
A crisis can sometimes bring out less favourable behaviours in business relationships. In what have thankfully become rare instances, less enlightened advisory firms may push for a business to take wholesale, immediate actions that could either compromise reputation or unnecessarily tap into cash reserves (and in the end burn longer-term commercial relationships too).
In these instances, company Boards need to be thoughtful, to filter and challenge when these dynamics are perceived to be in play. A particular case in point, likely to come into focus over the course of this year, will be the extent to which Company Voluntary Arrangements (“CVAs”) might be aggressively promoted as a mechanism for re-basing company liabilities.
There will be plenty of occasions where this is the best answer for the survival of a business, but it would be disappointing to see a wave of CVA’s aimed purely at avoiding government creditors ultimately at the expense of the taxpayer.
Safeguard your relationships and reputation
At the heart of having options and networks, is the preservation of relationships and reputation. As champions of patient capital, BGF has long recognised that both are essential to future sustainable growth.
As we have seen from government measures to date, the overall recovery will be dependent on large amounts of money, and large amounts of money requires enormous amounts of trust.
While it is our working assumption that the current situation will get harder before it gets easier, it is our hope that businesses, and the financial and advisory communities across the UK, remain pragmatic and collaborative.
At the risk of sounding like a quote on a keyring, now is the time to keep calm and carry on in the hope that we will soon settle into our new normal – whatever that may look like.
John Swarbrick is Head of Portfolio at BGF
Business funding insights
BGF explains: What is an equity sale?
We explain what is involved in an equity sale and consider the benefits for businesses that wish to raise capital.
BGF explains: What is a debt-to-equity ratio?
We explain what a debt-to-equity ratio is used for, how to calculate it, and how to gauge what is an appropriate level for your business.