Updated: Jul 24, 2020
FEON WONG | LEGAL JARGON WRITER
Covid-19 has evidently scarred many SME companies. With customers deferring their payment to keep their cashflow running, businesses may find themselves caught in a distressing situation as they need cash to run its operation. Urgency has prompted these victims of the pandemic to look for other ways of raising capital. Here is what they can do:
Whilst it is usual to chase companies for payment, many will find this approach to no avail as their customers are under immense pressure to keep their companies alive. If companies insist on chasing these payments, the tension between both parties will eventually lead to court proceedings where the other party may evoke a ‘force majeure’ clause for protection. It is perhaps unsurprising for these businesses to in turn delay the payments to their suppliers at the expense of damaging their reputation. Alternatively, managers may opt for the usage of factoring company, or in other words, accounts receivable financing. This allows one to collect payment within 24 hours, instead of 30, 60 or 90 days, at a lesser sum after the factoring company purchases the open invoices. The immediate cash can then be used to grease the company operation’s wheels.
The banks can be a businesses’ friend during stressful times. Some banks have since offered deferred payments, fee waivers or provided personalised assistance to customers impacted by Covid-19. Overdraft facilities might be one of the company’s options but the repayment of debts in the future has to be taken into consideration.
Equity finance may be favoured by private companies; not to those who have gone public. Nonetheless, the uncertainty arises due to the pandemic and the likelihood of changing consumer behaviour have prohibited investors from making their bets. The stark reality is some companies, especially those operating in the hospitality sector, will hardly recover within two years and some may even risk disappearing forever. With this in mind, investors are likely to play a ‘wait and watch’ strategy by only investing in companies striving in the pandemic or not investing at all. Turning to existing investors seemed to be a more viable option. Existing investors, reluctant to fail their portfolio, are likely to inject some cash into the distressed company.
Some of the schemes help companies to pay employees, such as Statutory Sick Pay and furlough scheme, while others help to fund the businesses through loans. Ranging from the Local Authority Discretionary Grants Fund to deferred VAT bills, the government has demonstrated its every intention to help companies and citizens in need. It should be noted that some of these schemes are unlikely to last long and thus, companies should continue finding their way out of the pandemic.
Legal services are expensive. It is even more so if companies engage lawyers for court proceedings that may last for years. Reliance in litigation finance largely grew in the 1990s to fund legal claims. Third party investors fund the legal claim with the intention to obtain a fraction of the return if the court case was successful. Despite being risky, investors like the high return and the short investment duration that typically ranges up to 3 years, as compared to other asset-class investments that take up to 5 years or more. Although this approach may be initiated without impacting cash flow or liabilities, companies should acknowledge that they will need to pay a large chunk out of the eventual settlement which is viewed as unfair by some.
The vaccine, successfully produced by Oxford University, may shed light to the recovery of the economy. Still, companies are encouraged to revise their business models in face of other black swan events in the future.
LLB student at The London School of Economics | Communication Officer at Japan Society at LSE
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