And how do you turn this crisis into an opportunity to emerge with a leaner, less costly business?
All over the world governments have been announcing and implementing measures to help businesses cope with the fall-out of the COVID-19 crisis. Which are the most relevant support schemes and what’s the criteria to benefit from the Belgian government’s 50-billion-euro ‘bazooka’ state guarantee? Importantly, how can you best prepare for discussions with banks and other money lenders?
“Cash is king” has never been more true than today: even the most profitable companies can go bankrupt if they don’t have access to enough liquidity. If you’ve cash or access to cash sources, you’ve time to look for restructuring options and other solutions. If you don’t, you need to think how to get it, and quickly, giving you less time to think about solutions and limiting your options.
Taking a direct cash flow forecast, based on cash-in, cash-out transactions, instead of an indirect cash flow forecast methodology, enables you to see whether your firm has the necessary stability to ride out the crisis in the short term. Attached to your short-term cash forecast should be an easy-to-read narrative that gives consistency to the story you’re bringing and indicates the cash-enhancing measures you’re thinking should you require them. This forecast is important when you’re asking third parties for help. Your ability to create a coherent forecast helps build trust and credibility with the stakeholders you’re approaching for support.
Tax expertise can add real value in drawing up a direct cash forecast, especially when it comes to leveraging the many measures governments around the world are putting in place to help firms weather the storm of the COVID-19 crisis. These measures include some that offer permanent cash savings, such as putting people on temporary unemployment, others provide means for deferral of tax payments. It’s important that you understand what’s available and make use of those that can support your business.
Outside of specific COVID-19 measures, there are other actions you can take to save cash from a tax perspective. With relation to group insurance, look at risk pooling. Self-billing models can provide a positive impact on VAT cash flow. There are ways to optimise cash payments for employees and tax grouping or contribution systems can help you to save cash tax.
The government’s much-lauded 50 billion euro state guarantee is all about pushing extra cash into the market. The scheme’s limited to bank lending (new loans applied for between 1 April 2020 and 30 September 2020 with a maximum term of 12 months). Interest is capped and increased by the fee that the bank must pay to the state. Loans that fit the criteria will automatically be included even if you’ve not asked to be included in the guarantee system.
There’s no requirement to prove that your business has been adversely impacted by COVID-19. All non-financial undertakings, small and medium-sized enterprises (SMEs), self-employed individuals and non-profit organisations with permanent establishment in Belgium are eligible, as long as they’re not in the midst of an insolvency process and have no payment defaults from 1 February 2020. Public authorities are excluded. Banks will negotiate the specific use of the loan. Money provided must be used domestically.
When turning to the bank for additional funding, is it enough to have a good cash flow forecast or should you do more? If you think you need additional money or funding, think hard. New money means new debt to pay back, whether you’ve a guarantee or not. If you decide it’s the right move for your firm, you’ll need to show a mid- to longer-term business plan that demonstrates how you’ll drive the business forward, create value, etc. with an appropriate funding structure.
Sufficient attention should be given to the tax considerations, certainly when attracting funds from foreign banks or debt funds so as not to create substantial withholding tax leakages. A key question lenders will ask is how are you going to pay the money back?
What happens if your liquidity attempt fails? An immediate measure could be to request six months payment relief from your bank. This can’t be refused if you meet the required conditions. You could also consider a distressed M&A, selling your business, asking a third party to come in to help you or solvent liquidation to help create value. It’s important to know what’s possible and to keep options in mind, even when going through the process of getting additional funding.
Having a contingency plan isn’t just common sense, it’s part of your fiduciary duty towards shareholders, the company and its people.
This is an excellent moment to rethink your financial structure, both internal and external, for example. Maybe you could refinance, adapt the terms of your existing external debt or create a different mix in your debt schedule. Remember, this’ll likely impact your internal financing structure, as the costs of capital may change by doing so. Maybe consider a debt to equity swap in some countries in which you’re active or a debt waiver to boost equity.
Have you considered a debt buy back as a possible option? There are debt funds interested in buying debts and it could be an interesting transaction for both parties. The tax consequences of any action will depend on the countries in scope, as each has its own regime, the condition of the transaction and the way you set it up and implement it, but can lead to an important tax cash out if not properly structured.
Using the support mechanisms in place and taking the opportunity now to take tough decisions, e.g. stopping certain activities, changing your business model, undergoing a corporate simplification exercise, etc. could mean you emerge from this crisis stronger than you were before, with a business that’s leaner, more efficient and less costly.