This means they will rank ahead of some debts secured by lenders, reducing cashflow for businesses, and increasing personal exposure for guarantors.
The preference has been restored as part of The Finance act 2020, which received royal assent on 22 July 2020. The Government first announced its intention to revise the status of this act in the 2018 Budget, after previously abolishing it in 2003.
RSM said that the move puts SMEs and lenders under “further financial pressure at a time when they are particularly stretched by the pandemic”.
Tyrone Courtman, restructuring advisory director, RSM said: “Floating-charge lending, such as asset-based lending or invoice-discounting is a common form of business finance for many SMEs.
“These changes will make floating-charge lending riskier. In the event of insolvency, if there are outstanding Crown debts, these will be paid first, leaving little prospect of any return to other creditors through the insolvency process.”
He added: “Consequently, lenders may be less willing to continue lending without the provision of additional security, such as the insistence on personal guarantees from directors.
“This change comes at a critical time for businesses and their lenders. Businesses grappling with the impact of the pandemic on finances and the uncertainties surrounding future revenues, will have to adapt to the ‘new’ normal, which itself will come at a cost and stretch many businesses to breaking point.”