With the Covid-19-delayed Premier League season completed and promotion, relegation, and European qualification issues finally resolved, football clubs are inevitably thinking ahead to the 2020-21 season.
There has been an unprecedented level of uncertainty for clubs and, at the time of writing, it is still not clear when the Premier League – or any of the other major European leagues – will play to full stadiums again. In response, many owners and financial directors are diligently planning for the worst and assuming that there will be no fans in stadiums before the end of the year.
The loss of ticket revenue, merchandising, and food and drink sales presents a significant challenge for clubs. In the Premier League the hard cost of running on empty stadiums could be between £7m (€7.8m/$9.1m) and £15m for each club, depending on the size of stadium and scale of their matchday operations. The top football clubs benefit significantly from media and broadcasting revenues, but the clubs most reliant on matchday revenues now face a significant near-term challenge.
Historically, when facing a cash flow crunch, clubs have relied on affluent owners to provide additional short-term support. However, many of these individuals or groups are currently having to focus their energy, attention and investment on their main cash generating businesses – to ensure those primary businesses successfully navigate the economic impact of the Covid-19 pandemic. The result is that some football clubs will need to look for other ways to manage their current cash flow and working capital challenges.
For fans, the most visible indication of these challenges will be a reduction in the number and level of summer transfers. In addition, cash-rich clubs, already in a strong position going into the pandemic, may use this financial strength to drive the hard bargains with lower-ranked clubs – many of whom are more reliant on transfer fees as a key revenue stream.
As a result, with the exception of some of the biggest European clubs, many football teams will be looking to either borrow money to cover the short-term funding gap, until the fans return, or find ways to reduce costs.
Prior to the global financial crisis over a decade ago, many clubs would have resorted to borrowing against large fixed assets, such as stadiums, to manage cash flow challenges. However, using long-term lending to fund short-term spending carries risks for lenders – and requires the clubs to ensure they have set aside sufficient funds to repay when the loan matures. The result was several defaults after 2008, and the end of this type of lending for all but the largest clubs that fund real estate developments combined with their stadium.
Fortunately, since then, the market has matured considerably – both with the introduction of Financial Fair Play and the increasing professionalism of clubs’ financial departments. Football clubs’ finance departments are now staffed with highly trained accountants, providing greater comfort for lenders and encouraging more UK-based debt providers back into the market.
The main mechanism for lending is now receivable financing, which uses future guaranteed income to provide immediate working capital for clubs, smoothing the club’s cash flow throughout the year – which can be helpful during periods of low or reduced income as we are seeing currently.
Even under normal circumstances, cash flow management is an issue for many clubs because of the timing of centralised payments from leagues. In the case of the Premier League, payments from media revenues are made in July and December – with a third payment including prize or merit money in May. However, spikes in clubs’ expenditure, including player bonuses and contracts, typically fall at other points in the year – meaning a negative cash balance for clubs between December and March ahead of the May payments.
Right now, that pressure is exacerbated by the absence of game day revenues. The simple fact is that there are only so many costs that can be cut – so third-party financing could become a more popular option for clubs looking to navigate the coming months.
While receivables financing is designed to provide working capital, banks and private equity firms can also offer a potential source of larger funds for strategic or development finance. Whatever the need, institutions lend according to the security offered by the club and their own appetite for risk. Because they are contracted to receive a minimum sum each year from the Premier League – and therefore guaranteed income – England’s top-tier clubs still have a range of finance options available to them to help them navigate the challenges ahead.