Funding options and cash flow preservation during Covid-19

During these unprecedented times, a business’s requirement for cash has never been more relevant. In times of uncertainty, access to investment is always more challenging and making cash go further is a priority.

For businesses needing a cash injection which may have to be accelerated due to current economic circumstances, the following options should also  be considered in addition to the support recently announced by the Government:

• EIS/SEIS qualifying status on investment – The tax advantages associated with the EIS/SEIS regime, comprising income tax relief, CGT exemption and loss relief, have always been attractive to potential investors and never more so than now. To be able to benefit from EIS/SEIS relief there are criteria that need to be satisfied and, commonly, advanced assurance is sought from HMRC to give comfort to potential investors.
• Convertible loan notes – This is essentially loan stock that has a right to be converted into capital on a future event, which typically relates to either the maturity date of the loan, an exit event or equity raise. The attractiveness of convertible loan notes is that they are relatively quick to implement and the complications of seeking a valuation of the company is pushed down the line to a later trigger event with the benefit to the investor being a discounted rate on the conversion rate.
• Advanced subscription agreements – Much the same as convertible loan notes save that the investment is always of a capital nature, which may allow the investor to benefit from certain tax advantages such as SEIS and EIS relief. The issue of shares to the investor will again be determined by a future trigger mechanism.

An alternative to seeking new capital to finance a business’s cashflow, the preservation of cash is also a key tool and with salaries being a major cash outflow, alternative methods to remunerate and incentivise staff should be explored.

Employee management incentive (EMI) schemes which enable employees to take share options under a tax-advantaged regime or, where a company does not qualify for an EMI scheme, a company share option plan is a good option for a company looking to incentivise employees through future shares linked to a reduction in salary.

Other available taxation incentives should be considered to obtain short-term cash such as R&D tax relief. Companies that are eligible for the tax incentives are extremely diverse and as such we consider that using the term ‘R&D’ can often discourage companies from looking into the opportunity. R&D encompasses a much wider range of activities than most companies realise, and it does not just relate to the development of new products. If your company has previously undertaken technically challenging work, you should explore whether you are eligible for R&D tax credits.

What do you need to be doing now?

Whilst these are challenging times for businesses there are tools available to either preserve cash or make an investment proposal to potential investors more attractive.

Before entering into any financial agreement, it is important to get good advice. The role of the corporate finance adviser is vital, not only for their experience in raising finance, but also for their links with appropriate financial institutions and investors.

If you are seeking further investment or would like to discuss any of the topics covered by this article please do get in touch with Adam Kean at BPE Solicitors LLP or James Whittaker at Hazlewoods LLP.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.