Look beyond overdrafts to improve business cash flow

This is always the case, but for businesses of all sizes, cash flow is one of the most important success factors.

In an unprecedented year, this has never been truer, and while many companies have traditionally relied on overdrafts to spend less time, COVID-19 has changed goals in many ways.

It is understandable that the pandemic has affected the yields and profitability of some businesses, and with tighter credit in some cases overdrafts have been reduced or withdrawn. This can be challenging and it is important to remember that lenders have the right to withdraw this credit line at any time without notice.

After 44 years in the banking industry, most recently as NatWest’s director of communications for West Norfolk, I understand how global solutions can impact small regional companies. I’ve been through four major recessions during my career, and my experience is that trading outside of a recession is more difficult than trading through a recession.

I mean, while businesses can tighten their belts during tough times, the impact of delays on reduced cash flow can impact a business’s ability to function as orders increase.

I recently worked with a production customer who experienced this exact scenario. Even though the company continued to operate during the downturn, it was forced to invest in cash reserves to pay employees and suppliers and to keep things cool. When restrictions are lifted, the company inevitably sees an influx of orders, but with a 60 day payment term, it is now struggling to make up the difference until the money is returned to the bank.

During my banking days, I could probably offer these customers an overdraft or one-stop loan. Now that we are working with Complete Commercial Finance, we have access to even more options including invoicing, refinancing and special financing. Creditors. In reality, the business world cannot stand still and must be open to exploring other ways to create working capital in the current situation.

The government’s Corona Virus Business Interruption Loan Program (CBILS) and Loan Program (BBLS) are providing support for many businesses this year. In late September, Chancellor Rishi Sunak’s Winter Economic Plan extended CBILS and BBLS loans from six to ten years and introduced a Pay As You Grow option to provide greater debt flexibility and an interest-only deferred option for six months. Repayment without affecting the creditworthiness of the company.

There are exciting steps out there, but it’s important to think long term. Last month we worked with a client who used BBL but used the funds to buy equipment during the summer. Due to late customer payments, the company suddenly had difficulty with cash flow and needed to borrow to cover monthly operating expenses. Although we were able to obtain business loans, these short-term borrowing costs were higher than the 2.5% late fee for BBL which would ultimately cost the company more.

We are in uncharted waters with COVID-19 and we are only beginning to understand how lenders consider CBILS and BBLS loans when assessing a company’s financial condition.

The examples above show how a short-term outlook can affect long-term outcomes. It has never been more important to seek professional advice and use the ear and deep understanding of trading finance experts like us to get the most out of it.

While unfortunately we live in uncertain times and know that you have taken all the measures to protect your company’s financial future, this is definitely the best way to tackle the challenges that many companies will face in the months to come.

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Changes in flows in project financing

Project finance and cash flow remain major challenges in this crisis as construction companies not only in the UAE but around the world question their viability in the coming months.

Lack of financial and accounting discipline from associates generally exacerbates their struggles to go bankrupt in times of economic downturn. The well-known “need for credit,” which is generally structureless, has plunged many contractors into such a difficult cycle.

Due to the Covid-19 pandemic, ongoing projects were put on hold due to disruptions in the supply chain. Productivity is affected because contractors on site follow social distancing guidelines. Operating costs have increased as money has been diverted to reduce the risk of the new coronavirus.

Meanwhile, developments at an early stage have struggled to increase debt as originally envisioned by the project sponsor. As a result, several projects were postponed or canceled entirely.

Effective communication

The communication channels between construction companies and their creditors are becoming more important than ever. This communication needs to be open and focused on the desired end result that will protect the interests of both parties and allow the project to be completed by hand with the best possible outcome.

Restructuring of existing credit lines to accommodate the tidal changes is necessary so that contractors and their projects can survive. Today’s banks are very pragmatic about getting this desired result.

Fence with rings

One of the observations that lenders made during the 2008 financial crisis and the current pandemic crisis is that contractors who limit cash flow from their projects tend to perform better and increase funding for the project more quickly.

This is where the contract finance model appears, the term used by creditor banks. The model depends on the “what”:

The project’s first cash flow
Project implementation plan
A legal contract that describes scope, time, costs and responsibilities
After analyzing the above, the necessary financial instruments or “how” are structured:

Guarantees will be provided by contractors (bank guarantees for performance, prepayments and retention)
Procurement requirements, whether material or equipment (credit note)
Temporary cash flow deficits due to lengthy costs and receipt of payments by the project owner in accordance with the terms of the contract (short-term loan or overdraft)
For ring fencing to work, all payments made or received must be in a specific bank account which will only be used to complete this project. After completing the project, the account will stop functioning.

The communication channels between construction companies and their creditors are becoming more important than ever
Such an agreement requires the contractor to distribute proceeds to the accounts of the lender and the project owner for confirmation and acceptance to ensure that payments are only made to project-specific accounts. However, the refusal of some project owners to assign project assignments made it difficult for contractors to ensure proper cash flow funding from their banks.

Based on the above model, the bank will endeavor to support the completion of the project as much as possible, which will result in a guarantee return and termination of the engagement. The bank offers assistance if the source of payment is clear and unambiguous. They provide more assistance when payments are made and credited to project accounts.

This agreement also helps the contractor and their finance team maintain fencing project discipline and avoid the inconvenience associated with having funds on a specific project to attract other tough projects, ultimately leading to failure of the first project.

When the music stopped, the projects suffered greatly from a lack of new flows to cover previous withdrawals outside the project cash flow.

Hence, it is an ecosystem that must be in place if we are to protect and enhance the performance of this very important industry. All parties need to be aware that nothing can work in isolation and that the failure of either party is the failure of the project.

time for a change

Now is the time to build on this practice and work with regulators to facilitate a mandate to allocate project funds to guarantee banks. It is time for us bankers to rethink the burdens we have placed on contractors: canceled contracts, overdue certificates, and the amount, text and duration of bank guarantees under the project.

These are the real decisions we have to make to solve the real problems that hinder the development of this industry: writing fairer contracts; Promote the use of technology; and build sustainably. Now is always the best time to change.

In the future, any planning after the project should lead to a possible second wave of the Covid-19 pandemic. We all hope we don’t face such calamities again, but when they do we need to be prepared for them. Learning from the current crisis is the most important outcome of our current situation.

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