CM magazine Nov2021

ALTERNATIVE FINANCE
AUTHOR – Alex Waterman
WITH everything that
has happened and how
much life has changed
in the last 18 months it
would take a very brave
or foolish person to
write an article on what is likely to happen
in the coming 18 months. Make up your
own mind which one – or both – of these I
might be.
By means of brief introduction for those less
familiar with the organisation, UK Finance
is the collective voice for the banking and
finance industry. We represent around 300
firms across the industry, acting to enhance
competitiveness, support customers and
facilitate innovation. Both as UK Finance and
through predecessor organisations, we are
pleased to have had the opportunity to work
with the CICM and the credit management
community for many years and pleased to
share our views on what the months ahead
may hold for UK businesses.
On the invoice finance and asset based
lending (IF/ABL) and wider commercial
lending side, we have worked closely with our
members to track the impact of the pandemic,
the lockdowns and the subsequent economic
shocks on their client businesses. When
thinking of the months since March 2020,
Donald Rumsfeld’s often quoted and sometimes
(unfairly) maligned ‘known unknowns and
unknown unknowns’ reference comes to
mind. The crisis that many were expecting
at the onset of the pandemic – one akin to
the global financial crisis of 2007/8/9 where
liquidity froze, and trust between financial
institutions and real economy businesses alike
evaporated virtually overnight – thankfully did
not come to pass.
The speed and sheer magnitude of the
extraordinary fiscal interventions the
Government put in place – the Government
lending schemes and Job Retention Scheme
most prominently – ensured that an immediate
2007 style liquidity crisis was averted. Instead,
there are some very different challenges
ahead for both UK businesses and the finance
providers that support them.
VARIED STORY
At the start of the pandemic, UK Finance’s IF/
ABL members were supporting and funding
over 39,000 UK businesses, with a combined
turnover of £280bn. While the data referenced
following reflects a wide range of businesses
across the real economy (both in terms of
sector and size) the story varies greatly from
sector to sector and business to business,
of course.
Historically the average IF/ABL client
experienced payment days of around 55 days
– and IF and ABL providers help their clients
manage the working capital gap between
goods and services being provided and
payment being received by advancing funding
against the debts owed and also against other
assets. When the first lockdown bit in late
Spring of 2020, as per the 2007 playbook, it was
assumed that the payment of invoices would
come to a complete standstill, with debt turn
expected to rocket upwards for a sustained
period. As credit managers will be more than
aware, initially this did happen. Within two
months the average debt turn had gone up by
seven days with many businesses reporting
significant issues with their debtors.
However, from June 2020, and coinciding
with the take up of much welcomed
Government guaranteed loan schemes and the
other interventions, debt turn started to come
back down, to the extent that by the end of the
year, businesses were paying their suppliers
on average five days quicker than they were
pre-pandemic. Today the average debt turn
has settled at 48 days, some seven days quicker
than pre-pandemic.
Reinforcing the evidence against there being
an access to finance crisis (at least across the
economy as a whole), in addition to this, latest
UK Finance bank data (to June 2021) shows
that SMEs are sitting on an additional £70bn
in cash in their bank accounts compared to
March 2020. This seems likely to be at least
partially due to businesses – understandably
– taking out Government guaranteed loans
in order to bolster reserves against potential
continuing economic disruption and placing
those straight on deposit.
COMMERCIAL LENDING
Looking at the use of wider commercial
lending facilities, as at June 2021, SMEs with
overdrafts were sitting with an additional
£2bn of headroom within those arrangements
compared to March 2020. A similar picture is
seen in terms of usage of agreed IF/ABL facilities,
with clients only utilising approximately 50
percent of their total availability, providing
£4bn of additional headroom compared to prepandemic
So what is the story on the other side of the
balance sheet? There are clearly some virtually
unquantifiable liabilities – Rumsfeld’s known
unknowns - that have been built up over the
last 18 months, but what we do know is that
over 1.7 million businesses have accessed
£70bn of Government-guaranteed funding
through the Bounce Back Loan Scheme and
Alex Waterman
Even better is
the fact that the
current picture
suggests that
much of the
Government
guaranteed
lending will be
repaid.
Facility March 2020 June 2021 Difference
Current Account Cr Balances £116bn £163bn £47bn
Deposit Accounts £85bn £108bn £23bn
Overdraft Headroom £7bn £9bn £2bn
IF/ABL Headroom £9bn £13bn £4bn
Total additional cash £217bn £293bn £76bn
Advancing the credit profession / www.cicm.com / November 2021 / PAGE 21
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