The Press and Journal (Aberdeen and Aberdeenshire)
Navigating the virus crisis
The UK and devolved governments are implementing measures intended to mitigate the economic impact of the Covid-19 pandemic.
Farming businesses are reviewing their own positions and taking steps to protect themselves so that they are in as strong a position as possible to get through the crisis and emerge in a viable state.
The position of existing borrowing and the availability of future borrowing is critical and borrowers, banks and other funders need to consider a series of questions, including the planning of cashflows.
Businesses need to update their immediate and longer-term cashflow positions, capital expenditure plans and other business and financial forecasts as best they can.
They should take account of trading conditions and available government Covid-19 assistance with the likes of payroll, rates and other taxes, while bearing in mind possible diversification, the availability of business interruption insurance and possible asset disposals.
Assumptions underlying figures will be significantly less reliable than normal and the sophistication of advice and analysis required will vary greatly among businesses.
Another key issue to consider is the projection of borrowing requirements.
Financial forecasts will drive funding requirements: the level of borrowing is required, when it is required in order to operate or protect the business, and how and when it will be feasible to pay interest and capital.
Farmers should also be asking whether there are existing or possible future defaults under existing facilities.
Is the current position a “material adverse change” or other event of default? Is there a default cure mechanism? Can next payments be made – remembering overdrafts are technically repayable “on demand” anyway? Are financial covenants likely to be breached when they are next tested?
How much headroom is there on overdraft, invoice finance and other working capital facilities – and is it still available? Are capex or other facilities still available to draw? Can any conditions precedent to further drawing of facilities be satisfied and is it practicable, even at the level of getting documents signed?
When it comes to getting new money, you should be asking whether this can be raised with bank loans only or is equity needed from shareholders or a third party. Do you need the consent of other existing lenders? Are alternative unused sources of debt available, such as invoice or asset finance or asset-based lending? Are the Covid-19 grant, debt or guarantee schemes available and are any available through a current lender?
Lastly, close liaison between borrowers and lenders, and among lenders and all of their advisers will be critical to implementing the new arrangements and preventing unilateral action by one of several lenders that would jeopardise the new arrangements through enforcement, setting off any credit balances or preventing interim use of overdrafts and other working capital facilities.
Reviewing your business’s financial state of health on a regular basis is a matter of common sense and prudence but even more so in these extraordinary times.
Farming businesses are not immune in the current crisis but the steps I have outlined should go some way in helping you form a realistic view of your business’s financial situation and to take steps to mitigate against funding risks.
‘Farming businesses are not immune’