Recent years have been extremely challenging for businesses, especially those in the food and drink sector, with the increasing economic pressures following the COVID-19 pandemic and Brexit, rising energy costs, and heavy price inflation and interest rates. Consumers continue to struggle, and the impact of falling demand is likely to be felt first in sectors exposed to changes in consumer behaviour – particularly the food and drink sector.
The financial risks in the sector cut down to the core of the current financial crisis, where ingredients have increased on average by at least 40% due to a number of factors including increased fertiliser costs and global supply chain shortages. However, the most devastating factor of all is energy, with many businesses experiencing a 400%-500% increase in energy costs.
Many businesses face an uncertain future due to the UK's economic challenges. In June 2022, the number of registered insolvencies was 40% higher than in the same period in 2021, and many businesses are struggling financially and are facing liquidity issues. Between October and December last year, the UK Insolvency Service reported 1,673 insolvencies in the food and drink sector. It was even reported by CompanyDebt that over 2,500 UK small bakeries are at risk of becoming insolvent, due to their heavy reliance on wheat prices, which have soared following the outbreak of the war in Ukraine.
However, despite the difficult financial climate, there are practical solutions to assist. The world of business finance can be challenging and daunting for many, but banks are available to help reduce or manage the financial challenges posed by businesses. It is worth highlighting that many banks require security (in the form of a personal guarantee) to secure the debt. The following options are currently available to businesses seeking such help:
- Business loans: Business loans are available to new businesses and established SMEs. The loans are usually repaid over 25 years, making them suitable for companies looking for medium-long-term financing. The loans are not repayable on demand, and the company can take advantage of fixed and variable interest rates. Longer-term loans will have terms and conditions and financial covenants that the company must comply with throughout the loan. The loans are not as flexible as an overdraft, and the company could pay interest on funds they are not using.
- Overdraft: Overdrafts are a flexible short-term lending option for businesses looking to increase their cash flow and working capital requirements or cover any temporary funding shortfall. Unlike the business loan, the borrower will only pay interest on what they borrowed, but the bank can demand repayment of the overdraft amount at any time. In addition, the interest rate applied is nearly always variable, making it difficult to calculate the borrowing costs.
- Invoice finance: Many businesses could also benefit from Invoice finance. A business could receive up to 95% of the invoice sum in two days instead of waiting weeks or even months for a payment. This source of financing allows businesses to improve cash flow quickly and can be particularly useful for businesses that have few assets to offer as collateral for a bank loan. There is usually no need for additional security, and customers often remain unaware of the borrowing. Invoice finance funding can usually be approved and progressed quickly, compared to term loans.
- Recovery Loan Scheme (RLS): The Recovery Loan Scheme allows small and medium-sized businesses to access the finance they need to grow, survive and invest. There are a wide range of products offered including overdrafts, invoice financing, and term loans. Typically, term loans are available from three months to six years, and overdrafts and invoice finance are available from three months to three years. Businesses can use this funding for any legitimate business purpose, including working capital or investment. The scheme makes available up to £2 million per business group or up to £1 million for business groups in the scope of the Northern Ireland Protocol. The actual amount and terms offered are at the discretion of participating lenders. The government guarantees 70% of the finance to the lender. The borrower will always remain liable for 100% of the debt. HSBC are one of the many banks that have introduced a Recovery Loan Scheme - the Phase 3 scheme - open to new and existing customers, provided the business has an annual group turnover of £45,000,000 or less. The timing for processing applications will vary and are subject to receipt and satisfaction of some supporting documentation and information, such as cash flow forecast, business plans, and latest annual accounts. This scheme is suitable where the bank would not have been able to offer a commercial loan on the same terms. Businesses that received support under the previous Government COVID-19 guaranteed loan schemes are still eligible to access finance under this scheme. In addition, unlike the previous Government COVID-19 guaranteed loan schemes, this scheme is not conditional on a business confirming/proving they have been affected by COVID-19.
Facing insolvency? We can help
If your business is struggling to deal with the financial demands of the sector, then we might be able to help. Our team provides specialist advice to directors, banks and other financial institutions. We often deal with complex issues that arise in formal and informal corporate recovery procedures, from voluntary arrangements to liquidation, administration and restructuring.
Our team’s technical, legal and commercial expertise is there to help any businesses in the food and drink sector to identify potential issues before insolvency becomes a problem. Our positive and practical approach is engineered to provide the best outcome for our clients. In the current climate, we are able to help you protect your business.
This article was co-written by Jamie McGowan, Trainee Solicitor.