With Glenville Walker Consulting having recently launched its Banking Review Service, provided by Alistair Howard and Simon Robb, these regular articles/posts are designed to keep you abreast of the latest news in the Banking Sector, and provide some thoughtful pointers as to why you might want to periodically review your banking arrangements.
Carillion – How Viable is the £100m Support Package?
So, on Friday 2nd Feb 2018, the Official Receiver announced that some 377 Carillion staff were losing their jobs. Tragic for those staff members.
The following day, Saturday 3rd Feb 2018 it was announced that the UK Government was making £100m available in support of smaller businesses impacted by the Carillion collapse. On one hand, we should be pleased that the UK government has recognized that the SME businesses may need help here, but how good is this package in reality?
What is the Support Package?
At face value, the proposal is simple. Via the British Business Bank, up to £100m of additional funding is to be made available by the way of loans to businesses impacted. The loans proposed are :-
• EFG Loans – Enterprise Finance Guarantee• These have been around for a while, and the Guarantee element effectively means that the UK Tax Payer is underwriting 75% of the loan should the borrower not repay• The loans are provided through the major high street banks.• In reality, many SME’s are already familiar with EFG Loans – whether or not they actually took them out.• So, in theory, a viable business can request an EFG Loan to support its cashflow if there is a Carillion debt looking unlikely to be settled any time soon, or at all.
So, What is the Problem?
There are several problems that stand out :-
- This has taken 3 weeks to launch – for many SME’s the trouble started within 24 hours of Carillion’s’ collapse.
- Why so long a delay?
- It doesn’t give confidence that our leaders either genuinely understand how either the Banks or SME Businesses operate.
- This is far too slow to top up a loan system that is already in place.
- How long to do something truly innovative?
- This is a Loan proposal – and loans need to be repaid
- A typical scenario might be that the SME has paid for its supplies and at least some of the labour needed to install those goods into a Carillion project.
- Therefore, that business may be doubly out of pocket (in cash terms) as it cannot recover the goods installed – but they have to be paid for.
- So how much does it actually need to replace stocks, retain staff (who will want to be paid whatever), and cover the hole in the cashflow left by the Bad Debt?
- Chances are this is quite a bit more than Carillion itself owed. And this takes no account at all of the ongoing business viability, with a new loan to service!
- EFG Loans are not cheap
- The advantage of the EFG loans are that they do not always require asset security – but the alternative is an interest bill PLUS a Guarantee Fee (typically 2%).
- Therefore, the business has to cover the capital repayments, interest and Guarantee Fees.
- All of this when they have lost one of their major customers.
- EFG Loans have varying success stories
- Alas, some of the High Street Banks have an unimpressive record with EFG loans.
- Articles are widely available on the internet to add depth.
- Loans take time to process
- With the crisis already 3 weeks old, how long can the SME cope with the cash shortfall, whilst their bank’s make a decision?
- Will the bank’s over-ride their credit scoring algorithms for Carillion Bad Debts, as it is likely that Construction Sector SME’s are less palatable than they were previously.
- Has there been any industry comment upon this?
Are There Any Alternatives?
At Glenville Walker Consulting we believe that there could be alternatives, but they do require a little creativity. In essence alternative solutions would require some long-term debt forgiving, and, possibly, some recovery through the Corporation Tax system?
Let’s consider one route :-
• An SME Company is owed £200k by Carillion• An insignificant amount to “UK plc” in isolation – but wholly business critical to the SME• The SME Business can clearly evidence the work completed and can raise an invoice or can provide details of all invoices raised, but unpaid (totaling £200k).• So, the Bad Debt is satisfactorily evidenced by the SME.
• The Official Receiver controls Carillion’s financial records, so it should be able to clearly see the contract between that SME and Carillion.• On that basis the Official Receiver (or a nominated agent – like a large accountancy firm) should be able to verify and confirm the invoice and underlying contract.• So, the Bad Debt should be satisfactorily confirmed by the Official Receiver.
• With £100m available to distribute, the British Business Bank can then pay, say, 90% of the Bad Debt across to the SME.• HMRC can be notified and that SME can be obligated to pay an additional 2% pa Corporation tax, until the cash advanced is repaid.• In effect this is a state backed form of Invoice Discounting• Director Personal Guarantees might be sought for a proportion of the debt – just to keep the Company Directors focused
This is only one suggestion, and it shouldn’t be too difficult to administer. It is certainly simpler than a loan application system – and it focuses only upon the generic problem (i.e. Carillion’s unpaid debts).
Here at Glenville Walker Consulting we would like to see some genuine thought put into helping SME’s. We all know our banking system has many flaws, so relying upon the banks to administer life support to failing SME’s is entirely counter-intuitive. To be fair, banks are not charities and it isn’t their job to make businesses work (other than their own).
Perhaps now is the time for us to call upon our political leaders to step in and help SME’s through this problem, to benefit us all as a result? Leaving the big banks to learn lessons from Carillion, and look after themselves, as they will survive. By looking after the SME’s this will significantly benefit the UK economy.
If you and your business is affected by any issues raised, please contact Hazel Walker, Commercial Relationship Manager on 0151 305 9654 or email@example.com to see how the Banking Review team at Glenville Walker Consulting can help.