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Debt, equity, and how the future of business finance may not be finance at all

By Alessandro Zamboni, CEO of Supply@ME, an innovative inventory monetisation company that enables businesses to generate cashflow, without incurring debt, by monetising their existing stock

Businesses across the world are stuck between a rock and a hard place.  Those that were seeing growth at the start of 2020 have likely seen their margins drop, at best impeding their expansion plans, and at worst forcing them to lay off staff or consider closing shop altogether. To try and stem the inevitable tide of insolvencies, governments, across the globe, have coughed up billions in emergency loan packages. In the UK, there have been nearly 1.7m individual applications for an emergency loan of some kind as of September, amounting to £60 billion in support, but for many companies, it is still not enough. As we gear up for another winter with the Covid-19 virus, we need to ask ourselves, is this a sustainable long-term solution?

Is there a better way for firms to unlock working capital?  Equity has traditionally been garnered by businesses by selling further shares in the company, but there are other ways that businesses can access equity and, by extension, more cash to enable recovery and growth.

On paper, the recent surge in emergency loans look great. Governments have pulled together the capital to save businesses from bankruptcy and keep people off the unemployment lines. Despite the risk of significant inflation down the line due to the money being printed through quantitative easing, these are the kinds of difficult trade-offs governments have to make when faced with an economic and social catastrophe. For the time being, such measures have effective – unemployment across the Europe, as of July, was averaging around 7.9% – only 0.4% higher than the same time last year. So, while unemployment is increasing, it has not been the workplace exodus that many economists feared at the start of the pandemic.

However, many businesses, especially SMEs, have already maxed out their government support loans, and exhausted that source of working capital. What is more, the banks have already started to tighten their credit belts, and successfully applying for new loan facilities or business overdrafts is getting harder by the hour.

The UK is a good example. Thousands of businesses up and down the country furloughed staff – an emergency measure to reduce the strain of staff costs introduced by the British Government, whereby employers can put their staff on temporary leave during which time up to 80% of their salary is paid by the Government. When this furlough scheme concludes on the 31st October, businesses will start to feel the strain. UK Chancellor Rishi Sunak has taken steps to soften the blow, announcing the Job Support Scheme to replace the furlough scheme, whereby the Government will subsidise the pay of employees who are working fewer than normal hours due to lower demand. As a result, the scheme will see workers get three quarters of their normal salaries for six months. Businesses will also be paid a £1,000 bonus for every employee they take off of furlough. However, while the scheme aims to stop mass job-cuts, the Government will only cover 22% of a worker’s normal salary for the next six months, and firms will have to top it up to three quarters.

If a business has exhausted its Government loan, and if the virus is still slowing down sales in six months’ time (which it most likely will be), this could most likely mean furloughed staff become redundant staff. Even under the Job Support Scheme, 22% does not cover the full cost of employing a member of staff, even with the £1,000 bonus. It is highly unlikely that the bank will grant any business a further loan when it is already in thousands of pounds of debt to the government. In the Chancellor’s own words, “I cannot save every business, I cannot save every job.”

Even if a business has successfully started generating cost-covering gross profits, they are later going to be hit by interest repayments of up to 8.9% on their Coronavirus Business Interruption Loan – a large chunk of anybody’s margin. This begs the question of whether loans are the long-term solution here. Governments across Europe and beyond have had a myopic focus on financing businesses with relatively traditional loans. But there is a ‘third way’ for businesses to get more cash that doesn’t involve any debt: equity.

Alessandro Zamboni
Alessandro Zamboni

Imagine that you run a successful British children’s toy manufacturing company, selling to the UK and international market. You have been a successful, steadily growing business for decades. You have been hit by COVID-19, but you are confident that, when the vaccine is completed or lockdown measures significantly ease, you will revert to normality. Over the summer months, you have been gearing up production in preparation for lockdown lifting and a busy Christmas season, so you have a large quantity of toys ready to ship whenever ready.

Your sales have been 30% down since mid-March, but thanks to an emergency loan from the government and a generous overdraft facility from your bank at the start of the pandemic, you were able to keep paying your staff to prepare for the Christmas surge. You have had no real choice but to put all your eggs in this one basket, and your success and survival rests heavily on a busy holiday season.

Though you have a small cash reserve as your rainy-day fund, money seems to be leaking away; outgoings that would usually be covered and surpassed by a steady sales margin. Inventory insurance, warehouse management costs, office rent, tax – all now being paid from your spare liquidity and government loan. You know that the repayments with interest on your debts will further cut into your margins, but you hope that Christmas will put you back into the green, and give you a longer runway to recover and return to growth.

However, this toy manufacturer is potentially sitting on hundreds of thousands of pounds in unsold stock. At the moment it may not be selling, but that doesn’t mean it doesn’t have value. This business is a prime candidate to unlock equity backed up in their stock – and that equity wouldn’t rely on its credit rating being squeaky clean – it would simply rely on the value of its toys, which is steady. The working capital this firm could unlock from unsold would cover all its costs and could even allow it to pick up the pace when the pandemic does finally subside. Furthermore, this business would no longer be hoping that Christmas goes well, and a second wave of the virus would not have the same catastrophic impact on the company.

Until very recently, there was not a way for businesses to tap into these assets. Yes, you could securitise the value of a loan against unsold stock for a short-term fix, but debt is expensive in the long term, and can stilt business down the line.

My company, Supply@ME, offers a solution to businesses – and since our IPO on the London Stock Exchange in March, right at the start of the virus, we’ve already partnered with banks, hedge funds, asset managers and other types of investors to unlock hundreds of millions of pounds for hundreds of businesses across Europe. But this doesn’t go far enough.

If businesses are to survive beyond the pandemic and not just survive its immediate impact, governments everywhere will have to find new, more creative solutions to funding businesses, and these need to be implemented quickly. Our model of working capital through equity from monetising inventory could help thousands of businesses trade through and then recover. As one company in an international market, we have to grow at a sensible pace and make sure that every step forward we take will work in the long term. But that does not mean to say that governments and policymakers cannot look at equity as an alternative to loans.