Finance payroll, pay employees, avoid bankruptcy, keep economy going – a fintech initiative in response to the covid-19 effect on business

As this period of business and economic insecurity deepens, when far too many firms cannot foresee where they will be in 6 months’ time, let alone where their staff will be, most are in desperate need of a ‘get out’ clause from an impending wave of financial catastrophe. This crisis is threatening the future of many, otherwise sound, UK businesses, the main cause being lack of cash to pay wages caused by the slump in revenues. Thus, many firms are having to lay off staff and lose parts of their business to keep the overall business a going concern.

For most businesses, their underpinning structure is their people. All the amazing products and services, technology and infrastructures in the world cannot help protect the employees from business insolvency, who, in their millions, face potential lay-offs. With payroll the number-one business cost, a delay of just one month could mean a huge lifeline for some firms, a deferment of several months, could save them completely.

The UK government is making every effort to prevent the loss of the country’s workforce, and while its furlough subsidies are generous, they naturally are time-stamped. Sadly business recovery for some will not happen, because during a staged recovery they will face all of the costs with none of the income. The financial effects of this crisis will not be just on SMEs, all businesses are at risk. So we need a plan B.

To that, we have just been alerted to an innovation initiative. We are not advocating that this will ‘save the world’ and we’re sure there will be more questions than answers on its ‘applicability,’ but we do think it is well worth considering and indeed sharing with your peers. In a nutshell: “the scheme allows the banks to raise the money on the London capital markets to pay the wages of the threatened companies, to keep the wheels of the economy turning, at no cost to the government or employer.”

To put it into context: the scheme has been in building phase for about a year now. David Brown, founder of Previse and Oxygen Finance, has spent many years looking at how we can finance suppliers more efficiently. Having implemented innovative financing techniques in that space, a team of finance experts started to wonder whether those techniques could be extended to financing the category of people. Basically, this led to the creation of fintech startup, Violet One, which offers close to “real-time” funding in the payroll space. He concluded in August 2019 that actually, people financing was possible. And in this time of financial urgency, he wants to offer the IP behind this scheme to the state – for no commercial gain.

According to David, this is how it would work:

“The scheme uses the capital markets to raise money to pay employees directly through the payroll companies. Some big payroll companies and banks are already on board. The money is paid back over the long term through the tax system. The borrowing is against the sovereign or state guarantee of the redundancy payments employees would have received anyway, based on legislation which is the employee’s right to be paid, and that loan is used to pay wages, retain employees and avoid bankruptcy.”

It’s highly likely that as the crisis continues the Government scheme will not be enough. So to protect people’s income, employers have to make it through the crisis. Letting the banks raise the money on the London capital markets to pay the wages of those on a computerised payroll means the money can be released within days, millions of people can get paid, and the NI and tax continues to be paid to HMRC.

“The money is paid back over a long term,” he says, “and while the employee gives up the right to statutory redundancy payment of 8 weeks, in return for being paid those payments upfront, they do retain their jobs. Payroll costs are not treated as a debt on a company’s balance sheet, so the scheme does not, like a normal bank loan, affect a firm’s credit rating or punish them with high interest rates. In effect, the loan is to the employee not the employer to keep the employer in business.”

“It’s clearly in the City’s interest to keep UK plc going. By using their money we can avoid massive Government debt and the treasury avoids redundancy pay, unemployment benefits, and still receives tax and NI contributions. The scheme can be up and running within days if the Government abides by the statutory redundancy pay promise, it is as simple as that.”

So effectively the solution allows any company to externally finance their payroll. Violet One is handing over its IP to the state to protect the economy, there is no commercial return, no cost to the government and no cost to the employer. Any SME or the self-employed can sign up to the scheme, and in doing so come through the crisis, continuing to pay wages and tax in the long term.

Our founder and business strategy lead, Jason Busch, thinks:

“The ability to combine a framework that looks more akin to supply chain finance (than anything else) with embedded technology, integrations and statutory payment requirements and backstops, is daring. But then effectively to "open source" it through the crisis is much more than this, especially given that the ultimate beneficiary is the individual who needs it most. Not only does it showcase London as the continued centre of fintech innovation in a time of crisis, it highlights that the team behind Violet are putting the citizens of the UK first. Let’s hope this scheme gets a chance. I’ve not yet seen a better one proposed for the worker.”

To understand the scheme better, read David’s article ‘The oncoming Financial Tsunami of COVID-19’ or contact Violet One.

If this initiative is going to work, the time is now, not in 6 to 8 weeks’ time, so we’d be delighted to hear our readers’ thoughts.

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Voices (4)

  1. Peter Smith:

    Really interesting idea – need to get it in front of folk at Treasury!

  2. David Brown:

    A huge thank you to the team at Spendmatters, and a special shout out to both Nancy and Jason. Please help by sharing this article as we NEED to get above the noise, and today the noise is LOUD. Governments are in panic mode, banks are in meltdown as their current loans [let alone new loans CBIL’s in the UK] are in meltdown.

  3. David Brown:

    Thank you to the entire team at Spendmatters and an extra thank you to Nancy and Jason. Please share this article as today it is about getting above the noise, and at the moment the noise is loud. Governments are in panic mode and banks in meltdown.

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