Tope Adebayo LLP Publishing Partner

Positioning your startup to survive and thrive during COVID-19, depreciating naira

Aug 19, 2020

Struggling businesses, rising unemployment and contracting GDP’s are the natural consequences of global economic crisis. Collectively, the dot-com bubble burst of the early 2000’s, and the Global Financial Crisis of 2008 led to a decline of about $84.4 billion in global VC Investments, and the devastating failure of many tech startups.

Within the startup ecosystem, an economic crisis implies a drop in equity funding, and in many cases (not all), a significant reduction in revenue which negatively impacts valuation. The COVID-19 Pandemic has established itself as a serious economic crisis with dire consequences for equity investments, and business threatening effects for startups.

There is an emerging pattern of Venture Capitalists (VC’s) pulling back on their commitments, and refocusing their target industries. A recent report by Forbes shows that while startups in industries such as e-commerce, public cloud and health tech are unsurprisingly experiencing a major boom during the pandemic, others in sectors such as real estate, travel and hospitality, have been negatively impacted.

In Nigeria, the struggles of funded startups are worsened by the constant devaluation of the Naira amongst other myriads of issues. It is therefore imperative that startups reposition themselves by possibly restructuring their business operations to survive the threat posed by the pandemic and the hostile business environment it has created. This article lends insight into some of these business recovery options available to startups.

Taking advantage of available stimulus packages

helping hand
Photo Credit: adam_moralee via Compfight cc

In a bid to remedy the consequential effects of the pandemic, governments have provided fiscal stimulus packages, tax reliefs, social intervention and welfare programmes to sustain businesses. Vulnerable businesses that hope to successfully ride the turbulent waves must be sensitive to these opportunities and be resilient in seeking them out.

For instance, the Central Bank of Nigeria (CBN) has provided a series of stimulus packages to cushion the effect of the pandemic on individuals and businesses. One of these is the CBN ₦50 Billion Targeted Credit Facility (pdf) for households and SMEs that have been hard hit by the pandemic.

To make the Facility more accessible, CBN waived the requirement for a guarantor. Also, sector specific stimulus packages such as ₦100bn Healthcare Research and Development Grant (pdf) earmarked for pharmaceutical and other healthcare providers in Nigeria have been introduced.

On May 27, 2020, the CBN issued the Circular on Regulatory Forbearance for the Restructuring of Credit Facilities in the other Financial Institutions (pdf) by which CBN intervention facilities availed through participating Financial Institutions were granted a further one year moratorium on all principal repayment effective from March 1, 2020.

Similarly, interest rates on all applicable intervention facilities were reduced by the CBN from 9% to 5% per annum for a year with effect from March 1, 2020. Financial Institutions were also granted leave to consider temporary and time limited restructuring of the tenor and loan terms for households and businesses affected by COVID-19.

Debt restructuring and refinancing

Startups with existing debt obligations may consider debt restructuring or refinancing to maintain liquidity. This will involve negotiation between the creditor and the borrowing entity to change the terms of an existing loan, which may include reducing the interest rate, or extending the due date for repayment.

However, debt restructuring negotiations must be approached cautiously and with expert legal support to avoid making detrimental commitments. Such negotiations are never an easy process especially where the loan contract does not contain an enforceable Force Majeure clause or where it would be counterproductive to trigger the Material Adverse Change provision.

Interestingly, a few financial institutions have provided some forbearance in the form of temporary suspension of loan repayment obligations for SMEs and specifically, in the case of the Lagos State Employment Trust Fund, tech startups. Relevant startups with outstanding loan obligations should seek ways to make the most of this breather.

Effective human capital and business strategy

Teamwork

Once inventory has been taken and the financial standing of your business is ascertained, it is crucial to avoid pressing the panic button within the organisation.

Where dipping financial status makes it impossible to pay the enterprise’s few good staff, management should communicate effectively and work out a good strategy to ensure the business does not lose good hands in the long run.

Use the opportunity to identify the gems and explore options to retain them. An option is to propose work from home at reduced hours and minimal pay until business picks up rather than a mass exodus that might prove detrimental to the business one year down the line. The enterprise might also want to take a critical look at its business plan and take a calculated detour from its product line or services if need be.

For instance, as the Hotel and Hospitality industry has been hard hit by this crisis, those who are able to adapt are those who are more likely to survive. A small restaurateur may need to enter into good partnership with a delivery business and focus on food delivery to homes and offices. Or seek out partnership with supermarkets and strategic local grocery stores for no-contact food sale.

Surviving the depreciating naira

It has been a few months since the CBN issued a press release confirming resumption of the provision of foreign exchange to commercial banks for onward sales to SMEs wishing to make essential imports needed to revamp economic activities across the country, but at what rate?

Many tech startups have trans-boundary partnerships and business obligations. A good number of them rely on foreign partners and expatriates to sustain business operations. Some have loan obligations to repay in foreign currency. However, the constant depreciation of the naira constitutes a major risk to their cash flow, and increased operational costs. Thus, while businesses are still battling with the economic implications of the Pandemic, they also face the simultaneous challenge of the swift depreciation of the naira.

Where it is possible, startups should consider sourcing their raw materials and services from local suppliers to avoid incurring obligations in foreign currency. For technology startups, this may imply turning to local developers and technicians instead of expatriates or Nigerians in diaspora.

For businesses in the production line, this might involve scaling down or avoiding those raw material contracts from China in exchange for local sources where possible to prevent the high cost associated with importation. Strategic alliances will need to be formed that will ultimately lead to the reduction of operational costs and a consequential widening of the profit margin.

Investment options denoted in foreign currencies may also be a viable option. Due consultations must be made with legal and investment experts before committing to this. It is advised that only low risk investment options should be considered, and the same must be duly insured by a reputable insurance company.

It is also advisable for startups to insure all aspects of their business operations to minimise risk exposure in the event of unforeseen economic shocks.  It is equally advisable to consider the potential depreciation of the naira when making contractual commitments especially with foreign partners. Consider reaching some compromise with existing foreign partners in view of the progressive depreciation of the naira. Like the negotiations on debt restructuring, this must also be approached cautiously and with expert legal support.

Conclusively, the truth is that the best way to insulate a business from the effects of currency volatility is to prepare for it. The solutions proffered above are strictly curative measures which are not as effective as preemptive solutions.

Whilst the Nigerian economy gradually heals up, startups and SMEs must be alert and ready to harness various business recovery options. However, there must be evaluation of the long-term effect of any option they seek to take, especially where the option involves changing the framework or restructuring the business. The importance of expert guidance through this process cannot be over emphasised.

To find out more, visit our website.

Featured Image: majjed2008 Flickr via Compfight cc

Contributor
Peter Okoyomoh
Peter Okoyomoh

Peter is an associate at Tope Adebayo LLP. His interests span across Environmental, Labour and Intellectual Property law

📧: p.okoyomoh@topeadebayollp.com
📱: + 234 1 628 4627

 

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