Or how funding is undeniably the weakest link… The funding channels are impenetrable or almost ...
In the context of the COVID-19 pandemic, a systemic financial crisis has developed. Businesses are, to a greater or lesser extent, faced with insufficient liquidity to meet incompressible current expenses, payment of suppliers, etc. In order to compensate for declining business, sluggish turnover and collections, companies have no choice but to resort to massive cash injections. They will then have to fall back on a substitute cash flow, as the "natural" cash flow resulting from economic activity at cruising speed proves to be lacking. While recourse to external financing from banks appears at first sight to be the most obvious and attractive option in that it provides rapid and certain access to the necessary liquidity, this alternative is far from being a panacea in that it may prove extremely costly in the long term, even if the interest paid will escape the rules limiting the deductibility of financial charges and will therefore be fully tax deductible. As a good father, any company could be tempted, given the future economic uncertainty, to apply for a PGE (State Guaranteed Loan) in order to provide itself with a pocket of comfort and security and to protect itself against possible bankruptcy. However, this source of financial oxygen must not become a preferred method of financing for the company, by artificially and in the long term dangerously replacing its natural cash flow. It should only be activated as a last resort, because here again it can prove costly:
- (i) First of all, with a "cash" effect in the event that the State aid repayable “in fine” extends beyond the 12-month "grace period" with a zero rate resulting from a negative EURIBOR: the risk linked to the cost of financing for the banks could weigh negatively on the company;
- (ii) Then, over and above the abovementioned actual cost, there is a potential cost in the event that the entities benefiting from a PGE were to be members of a group subject to a distribution ban that contravened that ban, obliging the beneficiary entities to return the State aid and then placing them in a possibly irremediable financial situation.
Thus, although the bank infusion may seem reassuring by giving direct and almost instant access to the necessary cash, it is nonetheless a reflex solution in a climate tinged with financial tension and uncertainty. However, it is neither the only solution nor necessarily the most appropriate one. Financing solutions are in fact very diffuse and some may prove to be much more relevant in that, for example, they will not generate any additional costs. The situations of companies and groups are also very diffuse and will therefore have to be assessed on a case-by-case basis. In terms of choice, the company will be embarrassed!
- First of all, it will be able to activate the tax levers that will very often prove to be very effective liquidity providers (measures that improve the effective tax rate, reduce the tax burden by "crushing" the tax base by maximizing tax-deductible expenses, promote consolidation or reduce financial costs).
Taxation to the rescue of the treasury is not a myth but a reality.
- It will then be able to alternatively or cumulatively monetize certain assets on its balance sheet, systematizing a form of gradual self-financing according to the mechanisms chosen and implementing, from the purest form, direct transfer to the most sophisticated form, such as
However, it must be noted that the balance sheet contains assets (shareholdings, receivables, databases, patents, goodwill, real estate assets, etc.) which are all sources of liquidity in the making. The monetization of assets, whether fixed or current, is therefore a fundamental issue in financing in that it enables very short-term liquidity to be generated
. The monetization of assets will require the implementation of dedicated (e.g. factoring for trade receivables) or transversal (trust, lease-back) mechanisms. It will be necessary to delve into the tax system applicable to each transaction in question, depending on the asset in question, in order to visualize the tax treatment applicable to that transaction and to evaluate the tax costs incurred. Even before the pandemic, companies had already become aware of the importance of monetizing their assets, if only to improve their cash flow
and working capital requirements
, culminating in trade receivables representing money that is "sleeping" in their accounts.
The pandemic only highlights this evidence, as companies have a vital need to quickly capture fresh and available cash. Companies therefore have a considerable toolbox to (auto) generate cash very quickly at a lower tax cost. The legal technique, together with its financial and tax counterparts, is full of procedures to be studied, which will prove more or less relevant depending on the asset in question, the company in question, its balance sheet structure, etc. This study is not intended to provide an exhaustive approach to all the possible mechanisms, as they are numerous and diversified (forward sales, repurchase agreements, etc.). In any event, a strategic financial approach will have to be adopted:
- Incorporating regulatory constraints such as those imposed by the executive which, in response to the pandemic, issued a FAQ (updated version of 2 April 2020) imposing a ban on large companies (meaning companies with at least 5,000 employees or with a consolidated turnover in excess of €1.5 billion, including groups) from making dividend distributions in 2020. This would mean that intra-group lending rates, forgiveness of debts, etc. should not be used as a reason to distribute dividends in 2020. Concentrating cash at the level of a national entity that falls under the ban, creating either a "cash trap" by freezing cash in the entity so as not to contravene the ban on distributions, or [in the event that the ban is ignored], calling into question the State financial aid allocated to other entities in the group, placing them in an inextricable financial situation (the aid granted, such as EMPs, deferred charges, etc., would then have to be repaid);
- Weighing the benefit of the immediate cash inflow against the financial and/or tax costs incurred;
- Measuring the magnitude of the risks incurred (tax risks, risk of unavailability of a monetized asset, etc.).
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