For fintechs, like any other business, cash is king. This is especially true during times of crisis. For those fintechs who manage to get the basics right as we head out of lockdown, post COVID-19 recovery will come. With it will come potentially game-changing opportunities for growth in a market more open to digitisation than ever before.
In the current climate cash flow will vary for fintechs. Those that have recently completed a funding round or have a strong relationship with their private equity or venture capital owner are generally more relaxed about cashflow, and not yet operating in ‘survival’ mode.
However, fintechs that were mid-funding round or starting to look for funding before the crisis have been more impacted.
The Fintech Times spoke with Emily Spooner, Director of Business Tax, at Smith & Williamson on the impacts on cash flow in the current climate. Emily specialises in advising corporate clients on a variety of business tax matters, with a focus on large corporate groups and fast-growth fintechs. Her clients range from challenger banks and FX providers to capital-intensive AIM-listed businesses.
What types or sources of funding should fintechs be exploring?
Investors are, in some cases, reconsidering previously agreed valuations, and/or renegotiating terms on deals to give themselves increased protection and/or influence. Other investors are simply focusing on existing portfolio companies and not exploring other investment options at all.
Furthermore, many fintechs do not qualify for access to the financing announced by the government – such as the Coronavirus Business Interruption Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme – or have been unable to access it.
At Smith & Williamson, several of our clients have been told to seek financial support from their investor, private equity or venture capital owner before seeking support under CBILS.
Fintechs, particularly those backed by private equity or venture capital are therefore looking elsewhere for funding, either to existing investors, or to strategic partners, angel investors, and other businesses in their supply chain. Some have applied for ‘The Future Fund’, which provides convertible government loans to innovative UK-based companies ranging from £125,000 to £5m. The loans are subject to at least equal match funding from private investors.
How can R&D tax credit claims form an important source of cashflow?
R&D tax relief claims provide an important cashflow lifeline for many businesses, often resulting in cash repayments, for both profitable and loss-making businesses. If your business is not already making an R&D tax relief claim, but you think you may be eligible, we encourage you to consider this opportunity as soon as possible.
At Smith & Williamson we have been working closely with our clients and HMRC to expedite the preparation, approval and payment process for R&D claims under both the Small Medium-sized Entity (SME) and R&D Expenditure Credit (RDEC) schemes. We have noticed a significant improvement in the amount of time it takes HMRC to process a repayment throughout COVID-19, which has provided crucial positive cash flow for businesses.
It is vital to be aware that some of the government support outlined above, Coronavirus Business Interruption Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme for example, are considered State Aid. As such, claiming these may prevent R&D claims under the SME regime. Therefore, fintechs will need to weigh up whether it is better to claim the support or make your R&D claim – the decision will be dependent on several things, including the quantum of the R&D claim, timings (businesses may be able to access government support more quickly than their R&D claim allows), and commercial rationale (remember, many of the government support schemes are loans, not grants).
How can you continue to attract and retain talent when cash is tight?
It is vital to keep talent within the business as it is this combined brainpower that will drive recovery, but it can be a challenge at times when cash is tight. Several of our clients have acknowledged that they may not currently be able to give staff cash bonuses or pay rises, so they are looking for alternative ways of rewarding employees, such as share options or other equity rewards. Other non-cash forms of incentives can be a useful tool for rewarding employees without having to part with essential cash that is keeping the business afloat; they can also be tax efficient.
What other things impacting cashflow should fintechs be aware of?
As part of a raft of measures aimed at mitigating the economic impact of COVID-19, the Chancellor announced a temporary deferral of all VAT payments. The deferral applies to all VAT payments due from 20 March 2020 until 30 June 2020, which will not be due for payment until 31 March 2021. Fintechs will need to ensure that they have reinstated any direct debits for payments due after 30 June 2020 to avoid late VAT payments.
On the whole, well-established fintechs have so far displayed resilience through the pandemic, with the exception of Wirecard of course. Fintechs are, more often than not, nimble enough to pivot their business models, think flexibly and innovate quickly to take advantage of newly created gaps in the market. The pandemic has shone a light on what fintechs will contribute in the ‘new normal’, but for many keeping cashflow secure in the short-term will be the priority.
