Automotive Sector Experience

Our Automotive Sector Experience

The automotive industry has experienced a raft of challenges over the past few years, with the future looking just as volatile. As a globally connected industry, it was one of the first sectors to suffer significant disruption as the Covid-19 pandemic took hold in 2020, affecting every part of the automotive industry from those involved in the design, development, and manufacturing of vehicles, through to the dealerships who sell the finished product to the public. While this period may seem like a distant memory to some, for others the long-term effects are still having an impact. 

Significant changes in buying behaviour with the shift over to electric vehicles, presents huge opportunities for those already operating in the sector, but also opens the door to new entrants, increasing competition and ramping up the pressure. Automotive companies need to ensure they are in a prime position to seize these exciting and potentially rewarding opportunities, and this starts with being on a solid financial footing.

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So what can you do if your automotive company is experiencing financial distress, and how can you begin to turn the situation around?

If your automotive business is struggling either on a financial or an operational level, the good news is that there are a range of business rescue and recovery strategies which can be explored, particularly if you believe the company to be viable over the long-term.

For businesses which have a healthy and profitable trading history, the current challenges do not necessarily mean that this is the end for the company. Instead, the company may simply need to undergo a process of restructuring – whether operational, financial, or a combination of both – in order to get back on track.

In an uncertain economic climate, having a solid, robust, yet flexible plan for the short- and medium-term is paramount. Manufacturing capacity may have to be streamlined to preserve both funds and resources, as well as a consideration given as to whether your organization needs to exit unprofitable markets to preserve cash reserves until the financial outlook improves.

Formal negotiations through a CVA

If your company has found itself operating on increasingly reduced income and you are at risk of defaulting on covenants, or other financial arrangements, it is imperative you liaise with the bank in order to find a way forward.

Entering into negotiations with your creditors can help stabilise your company in the short term, while waiting for revenues to increase. This type of negotiation could be aimed at one creditor in particular – such as a bank, HMRC, or a supplier – or alternatively, you could propose a repayment plan with a number of creditors at one time by way of a legally-binding repayment plan known as a Company Voluntary Arrangement (CVA).

CVAs are a formal insolvency measure which can only be entered into under the supervision of a licensed insolvency practitioner. A typical CVA will run over 3-5 years and allow for a financially distressed company to pay back its outstanding debts at a rate which is financially sustainable.

A proposal will be drawn up which takes into account the company’s debt level as well as its ability to repay, which creditors will then be invited to vote on; at least 75% (by value) of the company’s creditors must give their agreement in order for the CVA to be implemented.

An accelerated version of this process known as a Fast-Track CVA, aims to achieve the same result for both company and creditors alike, but with less intervention needed by the insolvency practitioner. This not only speeds up the process, but also considerably cuts down the professional fees incurred over the duration of the agreement.

Capital injection and capital refinancing

If the business is generally performing well, an injection of capital to top up its working cash reserves, or alternatively exploring refinancing options, may be required.

Refinancing existing company borrowing can be a challenge at the best of times, but particularly in the current climate. Many lenders have gradually lessened their appetite for risk, making it increasingly difficult for businesses to secure the vital funding it needs particularly during this period of economic uncertainty.

If business performance has recently fallen, it may be more challenging to demonstrate to lenders the ability to service liabilities, particularly if it fallen behind projected forecasts. Enlisting the help of a commercial finance expert, can ensure the case for refinancing is presented in the most appealing light, while addressing the issues the business is currently facing.

Taking the appropriate steps now can ensure your company is in the best position possible for future success and growth able to weather whatever today's uncertain economic climate brings.