In this current emergency situation, securing liquidity and thus the company’s solvency is the top priority. With the COVID-19 credit facilities, the Federal Council is offering an unbureaucratic and extremely effective means of support for our small and medium-sized enterprises. But this instrument is tied to clear preconditions and significantly restricts entrepreneurial freedom of action while the credit is being utilised.
Alternative means of securing liquidity
With this in mind, I believe that COVID-19 credits should be seen as a last resort for securing liquidity. Whenever possible, other financial measures should first be examined and implemented.
- Granting of payment deferrals by creditors
- Contribution from owners (granting of loans, capital increase or à-fonds-perdu grants)
- Increase of existing credits and/or credit limits
- Applying for new credit lines or loans from third parties (including bank credits, crowdlending, related parties)
- Conversion of short-term liabilities into long-term liabilities or, if need be, equity
- Sale of non-operating assets
- Sale and leaseback
Applying for the maximum
If a company has to resort to a COVID-19 credit to secure its ongoing liquidity needs, I would generally apply for the maximum possible credit amount, i.e. 10% of last year’s turnover. In this way, a certain liquidity cushion can at least be maintained for the coming months, which will be associated with many uncertainties, in addition to the directly determined financing requirements.
Restrictions provide incentive for repayment
If it turns out that the credit amount is not fully utilised after all, the corresponding amount can be repaid. The repayment terms are generally flexible. Thus companies may repay the credit according to their own needs within the envisaged maximum term of five years or, in cases of hardship, seven years. According to the model contract, the bank may require periodic repayments and may reduce the credit limit by unused portions of the credit on its own initiative.
While the COVID-19 credits are taken up, entrepreneurial freedom is in any case restricted. This provides a strong incentive to repay the guaranteed credit as soon as possible.
- No new investments in fixed assets
For the period of use of the COVID-19 credit, the company may only make replacement investments in fixed assets. Growth and expansion investments are not permitted.
- No granting of credits to third parties
Under Article 6(3)(b) of the Ordinance, the granting of credits to third parties, group companies or shareholders is excluded while the credit is being utilised. (b) of the Ordinance, the granting of credits to third parties, group companies or shareholders is excluded while the credit is being utilised. This is intended to prevent COVID credits from being diverted.
- No refinancing of existing credits
The Ordinance further prohibits the use of COVID-19 credits to refinance existing credits. But ordinary repayments and interest payments under the contract for existing bank credits are permitted; within this limited framework, bank credits are not regarded as personal credits. It is also permissible to refinance account overdrafts accumulated since 23 March 2020 with the bank or PostFinance AG which grants the COVID credit.
- No dividends and bonuses
During the entire term of the credit, the company may not distribute dividends or bonuses, refund capital contributions or repay shareholder or group credits, or finance any foreign group companies with borrowed funds.
Dividend distributions that do not directly affect liquidity, e.g. those posted to the shareholders’ current accounts, are also affected by this ban on distributions.
This regulation is particularly explosive in corporate succession situations in which the financing was structured by means of a takeover holding company, especially since existing credit obligations can no longer be serviced because of the prohibition of dividend distributions and the prohibition of granting credits on the assets side.
It is also easily possible to combine the COVID credit instrument with other financing solutions. The guaranteed credit can thus become part of an overall financing concept, which may be particularly important when financing larger companies.
On the website of the Federal Department of Finance you will find information on applying for bridging credits for companies and other useful links.