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18th March, 2020
[Given the rapidly moving picture, this is an update of our article with the same title originally posted on 13 March 2020.]
COVID-19 has had a dramatic impact on many businesses. The state of affairs unfolding in relation to COVID-19 is genuinely unprecedented. Businesses that are otherwise sound and well run are facing difficulties. There are a range of factors, but challenges are likely to be presented by:
All of the above will impact revenue. As the saying goes, cash is king. Many businesses are experiencing cash flow pressures through no fault of owners and managers. Sadly, there will be some failures despite unprecedented state intervention.
Businesses of all sizes are looking to policymakers to take action to alleviate the impact of COVID-19. Do central banks have the tools to mitigate the economic impact?
In early March 2020 both the US Federal Reserve and the Bank of England cut interest rates in response to the impact of COVID-19. This will help customers with variable rate borrowing. Nevertheless, with interest rates having remained historically low for over a decade (Bank of England base rate was last above 1% in 2009), central banks have little room for manoeuvre.
The ECB has offered cheap loans to commercial banks to encourage lending to small businesses and has expanded its quantitative easing program However, in contrast to other central banks, it did not cut rates. Its deposit facility rate is already negative at -0.5%, and its marginal lending facility rate remains at 0.25%. Cutting rates further may actually be counterproductive. The low interest rate environment is already a limiting factor on the ability of commercial banks to make adequate returns on equity, and therefore impacts their ability to increase lending.
Given the limited scope to use interest rates as a lever, central banks are more likely to focus on market liquidity. Co-ordinated action was announced on 15 March 2020 by the US Federal Reserve, Bank of England, European Central Bank and the central banks of Japan, Switzerland and Canada. The Fed announced that it would begin a programme of purchasing bonds (quantitative easing) to increase market liquidity. Other central banks also confirmed that they would ease monetary policy with asset purchase programmes. All of the central banks involved agreed to take co-ordinated action to increase the availability of US dollars to commercial banks via currency swap lines. This is intended to maintain global liquidity and financial stability. Quantitative easing measures are likely to be the main response going forward based on the experience of the financial crisis.
The Spring 2020 Budget was timely. Chancellor Rishi Sunak announced a range of measures to provide support to businesses.
Other countries are deploying similarly expansive measures. The US has announced a $1 trillion package of stimulus measures including sending cheques directly to American households. Germany and France have each announced measures to support business in the hundreds of billions.
COVID-19 is hitting businesses, including SMEs, across a range of sectors. Some businesses have suffered massive revenue drops. Many will continue to face real cash flow pressures, particularly if the abnormal situation persists for weeks or months as seems likely. Whilst central banks and governments have taken steps to support businesses and will continue to do so, commercial banks will be key to the survival of some businesses.
It is encouraging that each of Natwest, Lloyds, Barclays, Santander, HSBC, TSB and Virgin Money (amongst others) have indicated that they will consider repayment holidays and other measures to support business customers. The state backed measures noted above will increase the ability of commercial lenders to offer support to businesses as many had already signposted prior to the Chancellor’s 17 March announcements.
For any business that is experiencing cash flow issues (or can see from projections that it is likely to), it is important to engage with lenders as soon as possible. The danger of leaving matters too late is that time runs out. Cash is king, and the key to the survival of many businesses will be sourcing additional liquidity at an early enough time.
If you have any queries regarding business funding please do not hesitate to contact one of our team.
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