Of the £80.2bn in financial support provided by the Government to businesses since lockdown began, £27.5bn is deferred VAT payments. That means a third of emergency funding provided to businesses is due to be repaid in just six months – by March 31 2021.

For those businesses that have been struggling with cashflow, it is time to start thinking about how these repayments of VAT will be funded.

With the UK economy in recession and second quarter GDP 20% below the same period in 2019, funding these payments will be difficult for some businesses. If a business is facing a cash shortfall, then there are a variety of options that can be looked at. 

Firstly, a business could consider reducing its expenditure levels, for example by scaling back capital investment and administrative costs, as a means to conserve cash ahead of the VAT repayment deadline. However, this is unlikely to be attractive to shareholders as it could impact the longer-term growth prospects or even the viability of a business.

An alternative method of conserving cash could be to seek to extend the payment terms on supplier invoices, but given that many businesses are feeling the squeeze, creditors are less likely to be willing to accept such requests.

Another option for business with existing funding might be to ask existing lenders for amendments to their loan terms; for example, by asking for repayment holidays, interest deferrals or covenant waivers. Although, having been forced to be accommodating during the early stages of the crisis, lenders are now looking to manage their loan books on a business as usual basis and are less likely to be so agreeable moving forward.

Some businesses may also consider using the Government’s Payment Support Service to get more time to pay, for example through paying unpaid VAT in monthly instalments. However, that will still leave the VAT bill on the businesses’ balance sheet – making existing and new lenders nervous of such a large sum being owed to the crown who, in December this year, will once again become a preferential creditor (meaning that the tax bill would need to be paid ahead of floating charge lenders in the case of insolvency of the business).

So, what does this leave? In many cases, raising debt financing could be an appropriate solution and we suspect that HMRC will expect businesses to have explored this option before requesting more time to pay their VAT bill.

When heading down this route, a business first needs to work out the amount they need to borrow, for example by preparing short term cash flow forecasts on a conservative basis, and have a viable plan for how the debt will be serviced and repaid. A business then needs to consider what form of debt financing will be most suitable.

There are a variety of debt financing options, and a solution could include one of or a combination of some of the following examples:

  • Asset finance: allows a business to secure a loan against hard assets owned by the business that have not already been pledged to existing lenders, such as plant, machinery, vehicles or property. The loan amount that can be obtained depends on the value of the assets

  • Receivables finance: allows a business to borrow against unpaid invoices or the entire debtor book

  • Asset-based lending: a form of lending where a loan may be secured against the value of the hard assets owned by the business, its inventory and the receivables within a single facility

  • Cashflow lending: lending secured on the cashflows of the business, typically using a Debenture over the company

If debt financing is a viable option, then a business needs to plan ahead and move fast in order to get their loan application submitted in time. Most lenders will still be busy administering emergency loan schemes (although the CBILS deadline is at the end of September, lenders will still be processing applications until end November) and will have less capacity to review other loan proposals. Many lenders have also recently increased their due diligence requirements, which means that loan applications submitted in the coming weeks will take longer than normal.

We expect that most applications will need to have commenced by early Q4 if they are to be funded by the March 2021 deadline, especially given the typical slowdown over the Christmas / New Year period.

As we covered in our most recent article, knowing which lenders to approach and how to present a loan application in the right way is key to successfully securing funding. Working with a debt advisory specialist can significantly improve your chances of success.

At Altenburg Advisory, we have strong working relationships with lenders and can help you determine which funding options are most suitable for your business. We advise from day one all the way through to drawdown.

Want to learn more? Please get in touch at info@altenburgadvisory.com.