Paul Zalkin, partner, restructuring and insolvency at business advisory firm Quantuma, explains what platforms should be aware of during coronavirus
For any business adviser, the consequences of the coronavirus pandemic has called for an especially dynamic approach. However, whilst phrases such as ‘the new normal’, or words such as ‘unique’ or ‘unprecedented’ may be catchy, they do little to create clarity and, in many ways, are misnomers. In reality, sense can be made of the situation and we do have the tools to help businesses navigate through it.
Prior to Covid-19, the world last experienced the devastating effects of a global pandemic in 1918 – beyond living memory (for most of us). However, on a granular level, many of the macro-economic consequences of Covid-19, and the issues facing businesses large and small, form part of our collective knowledge based upon our experience of more recent events.
Massive structural funding and central planning helped rebuild the world’s economies after the devastation of the Second World War; recessions involving mass unemployment have been navigated by nations throughout the life of capitalism; most conceivable forms of macroeconomic structural change have been faced during the 20th and 21st century – most recently the global liquidity crisis of 2008. We have been here before, at different times and in different circumstances.
This is a point worth making because it provides reassurance that there is precedent upon which strategies can be based and decisions made as the UK gets back to business. It also reminds us that we will make it through this crisis. When it comes to helping UK PLC, peer-to-peer lending platforms have a central role to play, especially given many are now authorised as lenders of the bounce back loan scheme and coronavirus business interruption loan scheme (CBILS).
It’s therefore worth considering the lessons we’ve learned from past crises and reminding ourselves of the specific risks lenders face when writing business during times of economic uncertainty. Faced with immense personal stress, precipitated by the possible destruction of a company which may represent their life’s work, some business owners may act irrationally and make poor decisions.
Experience shows that this can manifest in various behaviours: the wearing of rose-tinted spectacles in the myopic belief that everything will be okay, despite overwhelming evidence to the contrary; ‘ostrich syndrome’, hoping that by burying one’s head in the sand, the storm will blow over or ‘rabbit in the headlights’ syndrome, standing, transfixed by the problem, whilst the juggernaut bears down.
More cynically, a very small minority will choose to act in bad faith, for instance, seeking to borrow funds to extricate their business from obligations which have been personally guaranteed, or inflating the value of their company’s net assets to secure more funding than it is able to service. Those who lend against receivables will also know that the practice of ‘fresh air’ invoicing becomes more prevalent when the chips are down.
The lesson for all responsible lenders, now, more than ever, is to price risk on a portfolio-by-portfolio basis, taking these behavioural factors into account, or, for more relationship-driven lending, to ensure that suitably probing questions are asked during the underwriting process.
Equally, lenders must be alive to the fact that some corporate borrowers may see new forms of lending – for instance, a CBILS loan – as a panacea when, in fact, it will simply exacerbate their problems. For that, we turn to another of life’s lessons: sometimes you need to save people from themselves.