COVID-19 and its potential impact on IF companies

In these unprecedented times, we thought it was important to highlight some of the key issues that IF Providers and their clients are likely to experience over the coming months.

We expect the following to be issues that need to be controlled:

1: Non or delayed payments from debtors

With so many businesses on partial or full lockdown, the number of debtors paying at all, let alone to terms, will be severely impacted.

Any IF Provider is going to need to be prepared for this. The flow of cash through their facility will inevitably slow down, although at this point, it is impossible to tell by how much.

2: Reduced Credit Ratings

The Credit Rating of Debtors may start deteriorating as Credit Insurers review, reduce and remove limits, as late payment details are shared etc.

3: DSO going up

This will result in DSO getting higher and higher as time progresses and overdue debt will only be moving in one direction, UP!

Under a business-as-usual framework, this will lead to disapproved amounts growing and therefore availability shrinking at a time when Sales/New Invoices will also be heavily impacted.

4: Lack of New Sales/Invoices

The lack of new sales mixed with the business still requiring funding for ongoing trading expenses will mean that more clients are likely to consider Fresh Air or Advance Invoicing as their only option to stay afloat.

Usual risk management measures and verification will become very difficult to progress with, as debtor businesses may be running skeleton staff or with no office-based staff at all for a period.

5: Clients asking for overpayments and increases in pre-payment %

This is likely to be the most significant decision that any invoice finance provider has to make.

Do you advance further cash and hope that at the end you can recover it and get back into a business-as-usual formula, or do you hold off any further advances and leave the business to cover the shortfall through other means?

IF Providers should also consider whether they are effectively becoming shadow directors if they have clients who are picking and choosing which Creditors to pay, based on their drawdown amounts, and the Provider makes any suggestion as to which to pay.

Our recommendation

Our opinion, which may prove controversial, is that you should try as best you can to stick to the current advance rate and formula, but use all the resources available to you to mitigate the increased risk.

You simply won’t know if your Client is going to be able to weather this storm, and although it is important to support businesses through this period, there are other ways for your clients to obtain cash to cover this shortfall.

The Government have announced support for SMEs via guaranteed back loans, and although these discussions are in their early stages, we would hope that this should provide the liquidity to keep SMEs going at this time.

This is potentially being extended  to Invoice Finance facilities, but how this would work in practice to existing Clients remains unclear. However, this would make your risk assessment easier.

There is so much uncertainty at present you can’t even say with conviction that the money you already have out the door to your clients is safe, so we cannot consciously be advising any IF Provider to worsen their position at this time.

It is essential that IF providers realise that all of their Clients or their Clients’ debtors’ finances are going to get worse, so managing risk at this time is the most important task within your business.

How can we help?

Remember that we are the experts in the field of Receivables Risk Management, and we are more than happy to help you with any issues you may have.

If you would like any of your clients reviewed before making a decision, then please contact us today.

We can usually carry out everything we need to do remotely, but if a site visit is required, and the Client is still open, we will assess a safe way to visit and obtain what we need to help you make an informed decision.

If you need to contact us, in the first instance please contact our MD Glen Morgan directly.