Playing Defence: UK Businesses Prepare For a Recession

Playing Defence: UK Businesses Prepare For a Recession - Enness Global

Scott Monks

Buckle up for a big one: as the UK economy contracted 0.2% last quarter, the UK teeters on the brink of a recession. A downturn has been on the cards for some time, and while many hoped that a market contraction would be short and light, it’s possible that a recession will be protracted and could last well into 2024. If that comes to fruition, it will be the longest-ever recession in UK history.

Practically, UK businesses are looking at a barrage of threats: reduced customer spending, increased supply and energy costsinflation and tax increases as the government tries to bring the cost-of-living crisis under control and reduce huge public debt

For businesses, all these elements show that stormy waters lie ahead. But there is a silver lining: because companies know where (and what) the threats are, they can think ahead and prepare for them now rather than try and outrun them or simply think about them later. Some businesses that run into deep water during a recession are guilty of waiting too late after seeing the effects on their cash flow and balance sheets to find a solution. While logic dictates that making the wrong business decisions in a recession is a strategic disaster, making no decision at all is almost guaranteed to end with the same result. The trick, therefore, is to move in advance.

How to Play Defence

For companies that know they will feel the pinch and want to access debt – especially if they operate in an industry that has been hard-hit in a previous recession – thinking about how lenders will assess their suitability for finance is something that needs to start now. 

Some corporate finance lenders have been acting as if the economy is in recession for some time, which means they have already taken initial steps to adapt their lending criteria – they may tighten these further as time goes on. Corporate finance is still on offer, but it's much more a lender's market than it has been in the past couple of years, and barriers to entry are becoming more stringent.

For businesses that want the option of accessing corporate finance in the short to medium-term it's important to prepare carefully. Decisions to cut indiscriminate spending and bolster balance sheets need to happen now, even if raising debt might only occur in 12 months. 

Equally, cost-cutting should be strategic because it must benefit the bottom line without hampering the business' growth and revenue generation prospects. Ultimately, there is a delicate balance to be struck between cutting costs and stopping the company from accessing opportunities that will help it ride out a downcycle. Typically, fears of recession see marketing and sales budgets slashedstrategic acquisitions immediately shelved or key infrastructure investments put indefinitely on hold. If spending money in these areas presents an opportunity to give the business an edge during a recession, lenders remain open to financing that via debt (particularly with working capital loans to fund day-to-day operations while the business' capital reserves go into critical investments). 

Understand the Warning Signs

There are no exceptions: lenders will only offer loans to businesses that can irrefutably show they can ride out a recession or aren't in such dire straits that they can't be saved. There are winners and losers in any downturn, but lenders will only back companies who borrow responsibly and comfortably. Moving early to secure debt is essential if a company wants to bolster their position in a recession to ride out an economic contraction. In other words, businesses need to be highly attuned to anything that will make them seem less suitable borrowers in the short and medium term and get ahead with accessing finance. 

A strong trading and good credit history, customer demand and impeccable books are all key to accessing finance, especially in a recession. The business must also be sound operationally. There must be a good business plan and corporate strategy, a proven product or service, good demand (short-term recessionary impact to demand notwithstanding), solid and recurring income, a strong client base, and satisfied customers. If even one of these elements is off-balance or can't be proven, it can put access to lending at risk, so keeping the business operationally strong is as vital for accessing finance as it is for retaining customer demand for products and services. Lenders typically want companies to put forward security for a loan in a recessionary environment, and they will need to have the means to do so, too.  

A plan for how the business will use the finance and ride out the recession is also critical. This will need to go beyond simply cutting costs and waiting for things to return to normal, especially because there is apprehension we are facing a prolonged recession. The quality, sophistication and detail delivered in this strategy – as well as the business' ability to prove the steps owners and shareholders are willing to take to support its ongoing success – is also key. 

Debt Restructuring Opportunities

It's now, not mid-recession, that is the best time to look at a business' existing debt with the view to restructuring it. This is especially important if doing so will facilitate the company's ability to ride out a contracting economy successfully. Most trading businesses will already have access to data and financials that will indicate how they will fare in a recession. Any signs of dropping footfall, revenue, reduced demand or customer spending or requirements for additional capital to take advantage of market opportunities should be taken seriously. Do not miss the boat: now is the time to use what that data indicates to maximum benefit. 

Many businesses with existing loans will have raised debt in very different economic circumstances where interest rates were low, inflation was (almost) non-existent, credit was plentiful, and the economy was thriving. As the financial landscape has shifted, many businesses will find that they have different requirements for their debt. These include optimising cash flow, maintaining the maximum liquidity possible and minimising repayments, rather than using debt exclusively to capture opportunities, as is usually the case when the economy is in expansion cycles. 

Types of Finance

A multitude of different corporate finance products are available. While lenders may become more restrictive in their lending criteria in the coming months, business loans are a mainstay of the corporate world, and they will remain accessible, whatever happens in the economy. Everything from VAT finance to working capital loans, stock finance, invoice finance, bridging loans and other types of finance are possibilities. 

For any businesses looking to raise finance over the coming months, the most important element of the lean will usually be the rate, but there are other considerations, too. The best corporate finance deals need to be highly structured – this is imperative for optimising loan capital and business success. Any corporate finance package should be arranged around the company's operating model, structure, and business goals and allow for the ability to negotiate the deal to optimise the loan in different ways to deliver the best possible outcome. 

The optimal finance package will look different to every business. For example, it can be through the arrangement of the most attractive repayment profile possible, negotiating a revolving credit facility, or applying for specific products like interest-only facilities. Sometimes, we can arrange multiple facilities to target different business requirements. For example, we can broker a corporate finance package that provides a short-term financing solution, followed by a second facility to support continued growth or recovery. The possibilities are endless, and what's best for an individual business will depend on their requirements, financial situation and how affected they are by a recession.

What's next?

While we hope we aren't on the brink of a deep and protracted recession, we know there are challenges ahead for UK businesses. However, we are also cautiously optimistic. UK businesses have weathered severe recessions before, only to come out stronger. We are still seeing pockets of growth in UK businesses. We also believe that COVID has made companies more resilient and agile and, in some ways, better prepared for a recession than they may otherwise have been. But perhaps most importantly, as Jeremy Hunt noted in his budget on November 17th, the British people are "tough, inventive and resourceful". By extension, British businesses are, too. 


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Any references to a particular tax or treatment thereof are for indicative purposes only and these may change in the future.
Your own tax treatment may be different and depends on your individual circumstances.