Help is out there to get cash flowing again

Cash is king, as the old adage goes, and never more so than during a global credit crisis. But what happens when you can’t be sure that your customers will pay? And what if your insurance against them not paying is withdrawn?

This is the problem affecting almost half of the packaging industry, according to a survey carried out by Packaging News this month. The study found that of the 60% of respondents who use credit insurance, 68% have had that insurance withdrawn for certain customers in the last six months.

Packaging is not the only industry affected by the collapse in credit insurance, and the government has been taking steps to tackle the issue. In February, the Department for Business, Enterprise and Regulatory Reform announced its ‘Real help with finance now’ scheme to help businesses through the difficult economic times. The package included information on how to access business loans, manage cashflow, reduce waste and save money. It also addressed issues such as funding for training, dealing with staff restructures and major business changes and getting time to pay tax bills.

Government guarantee
The scheme’s headline measure was the £1.3bn Enterprise Finance Guarantee (EFG), which offered government lending to businesses with a turnover of up to £25m that are currently unable to access adequate cashflow to support the business. The scheme is offering loans of between £1,000 and £1m until 31 March 2010.

Northampton-based Nene Packaging applied for the EFG. The manufacturer of screen-printed corrugated boxes for point-of-sale display was formerly a supplier to Entertainment UK, Woolworth’s distribution arm. Prior to Entertainment UK going bust just before Christmas, Nene’s bank withdrew its credit insurance, which forced the company to ask customers to pay more quickly.

“Customers are taking a lot longer to pay,” says Nene managing director Rob Lugmayer. “We are being a lot more vigilant when taking on new business as everybody is in the same boat.” Lugmayer experienced great difficulty applying for the EFG as the forms were not available and his bank was forced to adapt the now outdated Small Firms Loan Guarantee application form.

The bank has since rejected his application on the grounds of concerns over credit pressure from suppliers, but, as Lugmayer points out, the point of the loan is to reduce credit pressure. “The underlying problem is that banks are scared to approve loans in case they do and a business fails. Their jobs are then on the line for sanctioning a bad loan,” he says. “The banks must lend to small businesses.”

Paul Holohan, chief executive of industry consultancy Richmond Capital Partners, sympathises with Lugmayer. “There’s difficulty in even getting to speak to someone who can advise on the EFG and provide the forms,” he says. “You just can’t afford to wait.”

According to Holohan, up until as little as six months ago, accessing asset-based lending (ABL) was relatively easy. Yet today ABL, which combines finance against debtors, fixed-asset refinance and commercial mortgages on property, is virtually impossible to get. He explains that even when firms can obtain credit in this way, the rates, terms and personal guarantees are enormous. “Banks are trying to rebuild their balance sheets and, frankly, some of it is opportunistic behaviour,” he adds.

Banks are continuing to limit their risk by withdrawing credit insurance and in some cases mere rumours about the financial situation of a firm have been enough to initiate this. This, admits Holohan, is something the government can’t help with. Instead he urges businesses to research their customers and only take on orders that they can afford to lose. He admits, though, this can be extremely difficult.

Tax timetable
But if cashflow is the problem, one avenue worth exploring is the potential to delay tax payments. One of the government proposals established the Business Payment Support Service, which gives businesses the opportunity to arrange to pay their tax bill to a timetable they can afford. Furthermore, there will be no additional penalties or surcharges on tax within a time-to-pay arrangement, although interest will continue to be payable on taxes where it applies.

Each timetable is agreed individually in as little as 10 minutes. Companies can ask for a payment window of anything from a few days to a few months. According to a Revenue and Customs spokesman, there are few criteria other than that the business is viable. “One of the few times we would say no is if the business was on the verge of bankruptcy,” he says. So far 60,000 businesses have agreed a time-to-pay plan through the service.

Despite the schemes put in place to tackle the credit problem, almost nine out of ten Packaging News readers surveyed government should do more to improve the situation for businesses struggling to get credit insurance. At the more extreme end of the scale, more than 60% believe the government should introduce a nationalised credit insurance scheme. Obviously, the issue is a major concern for the industry and is forcing companies to put increasing pressure on their suppliers and customers, who themselves are struggling.

One thing is certain: in the current climate, it’s tough to guarantee cashflow. With some customers teetering on the brink and banks withdrawing finance, businesses across packaging need to know they will be paid for work they do. The government is acting, but it seems the message is not getting through that help is available. Packaging companies should take advantage.

REAL HELP WITH FINANCE NOW
In February, the government introduced a series of measures to help viable businesses with temporary cashflow problems. These included:

Enterprise Finance Guarantee (EFG) Businesses with a turnover of up to £25m can apply to a list of banks for loans between £1,000 and £1m.

Business Payment Support Service A scheme that allows businesses to arrange to pay their HM Revenue and Customs tax bill to a timetable they can afford with no additional surcharges or penalties.

Working Capital Scheme (WCS) The government is offering banks guarantees of up to £10bn to support banks lending up to £20bn. The aim of the scheme is to free up capital for redeployment to increase lending to businesses with a turnover of less than £500m.

Capital Enterprise Funds (CEF) A £75m fund that will allow companies to fund business development by selling debt in exchange for an equity stake in their business.

Regional Loan Transition Fund A £25m initiative to help businesses in England at a regional level until June 2009.

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