The coronavirus pandemic is evolving, and the available financial support and guidance from the Government is also changing on an almost daily basis. So, it’s understandable that many owner managers and finance directors are confused about what business funding is available, and what the best routes to finance may be if you’ve been adversely affected by the crisis.
James Maxwell outlines the most effective ways to bring additional finance into your business.
Key signs that you’re in financial trouble
Looking for the telltale signs of impending financial problems will be a vital task as this crisis deepens.
Key signs to look out for include:
- Getting low on cash – the obvious indicator to track and review is cashflow. If cash inflows are dropping and cash outflows are rising, it will be practically impossible for the business to maintain a healthy positive cashflow position.
- Increasing net current liabilities – if your current liabilities are larger than the company’s current assets, then this spells trouble. In a nutshell, if you owe increasing amounts of money, and don’t have the assets to pay up, you’re on dangerous ground.
- Customers taking longer to pay – as customers begin to feel the pinch, it’s likely that they will take longer to settle bills, or will begin reducing the number (or size) of orders. All of this will serve to reduce income and stretch your available cash.
- Being highly geared – highly geared companies are going to be under additional cash flow pressures, so should get in contact with their current lenders and look into seeking a holiday. This is only short term, however, and still needs to be repaid. Interest will continue to accrue unless you’ve agreed otherwise.
Taking out a loan should always be the last resort during this crisis. Under normal circumstances, your business would look for funding in order to grow, not to dig itself out of an emergency cashflow hole. This is an unusual situation that we find ourselves in – and one where we have to tread carefully.
Taking on more debt adds to liabilities on your balance sheet and will also mean making interest payments on any loan – so it’s important to explore other options.
What government support is available?
If your business is experiencing a drop in sales, reduced revenue and pressing cashflow issues, then you will almost certainly need to look for external finance. But it’s essential to explore the available government support first, before you begin looking at other routes to finance.
The government schemes are being regularly reviewed and updated, but at present, there’s a broad range of options for small businesses to consider prior to any business loans.
- Deferring your VAT payments and/or your self-assessment payments, and by doing so cutting your tax costs for the current period (although you will need to pay these later).
- Small business grant funding of £10,000, if you meet the criteria. As a grant, this is a great option, as you don’t need to pay back the money.
- Business rates holiday, if eligible. Again, this is a great way to cut your costs by reducing your outlay on business rates and freeing up that cash for working capital.
- The HMRC Time to Pay Scheme allows you to arrange a payment scheme for business tax payments with HMRC, but you’ll need to negotiate this with HMRC directly.
- The Coronavirus Job Retention Scheme (CJRS) allows you to ‘furlough’ staff, sending employees home whilst retaining their roles and claiming back 80% of their wage costs from the scheme, capped at £2,500 per employee, per month.
The need for robust financials and forecasting
To qualify for any of the government schemes, or to approach other lenders, you’ll need to have access to drilled-down financial information about the business
It’s important to not use the last set of signed accounts, as these could be 12 months old and will provide an out-of-date overview of the business.
Funding providers will want to see a forecast before considering lending, so having revenue and cashflow forecasts will be essential. You can start with expected costs and revenue, and project your cashflow in regard to those items. You can also forecast when customers are projected to pay their outstanding bills, to keep on top of debtor tracking.
What are the best routes to additional finance?
The Government has done a good job of telling people what support will be available, but a lot more detail is needed on how its financial support schemes will be put into practice.
If your business is being adversely affected by the impact of the coronavirus, then what you want is swift, decisive and easily accessible financial support. In my current experience, very few of our clients are seeing government money hitting their bank accounts.
So, if cash is getting tight, what should your strategy be? And which of the available routes to external finance should you take?
In order of preference for funding, here are the best routes to consider:
- Government grants – see what grants, rates relief and tax deferrals are available to your business (as mentioned), freeing up cash without entering into a loan agreement.
- Intergroup lending – if you have cash-rich companies within your group, consider if you can borrow internally.
- Invoice financing – selling off outstanding invoices to an invoice finance provider will provide cash fast, but terms are going to be less favourable as the crisis continues.
- Asset financing – if you have machinery or plant assets in the business, you can use these to take out finance and access cash – usually, a preferable move to a loan.
- Coronavirus Business Interruption Loan (CBILS) – the CBIL scheme allows you to borrow up to £5M, with 80% guaranteed by the government. There are currently 40 approved lenders, but the lending criteria hasn’t been updated to take into account the effects of the crisis on potential applicants. The chancellor has recently admitted this and has promised to make these loans easier to obtain (watch this space).
- Business loans – established banks, challenger banks and alternative lenders will be able to offer standard business loans. However, most lenders won’t be jumping to lend to cash-poor businesses unless you have very clear forecasts to back up your application.
- Unsecured finance – speak to your broker to find out the options. If you have the right contacts you can get unsecured finance to see you through.
Helping you navigate the business funding journey
It’s important to talk to your advisers before you enter into any kind of funding agreement. Banks will go through the application process with you, but speaking to your accountant or broker allows you to ask questions and get some real insight.
As business owners ourselves, we know the challenges you’re facing and can assist you at all stages of the funding journey.
Key ways that we can help you during this crisis include:
- Counseling you and your team – in these difficult times, I’ve spent over 50% of my time talking to and advising clients. We become a life coach, shoulder to cry on and counselor, all rolled into one.
- Advice on implementing emergency measures – we’ll help you get in control of cashflow, aged debt and cost-cutting, so you can proactively balance your cash position.
- Producing detailed forecasts – we’ll assist with the preparation of a detailed, prudent forecast to help you, your board and your executive team understand what funding will be required, and what purposes finance should be used for.
- Supporting your payment terms – we will provide you with ammunition to negotiate payment terms with suppliers to strengthen your working capital requirements.
- Scenario planning – we can produce flexible forecasts to enable you to plan for diferent scenarios and forsee any future issues.
- Brokerage advice – HW Finance is a broker, so we can advise and assist with your lending requirements and help you access the best lenders.
- Insightful business advice – we’re skilled business and finance advisers who run our own businesses, so we understand the best ways to support you.
How you deal with this crisis NOW will impact how you bounce back in the FUTURE, once the impact of coronavirus has receded. So it’s critical to get on top of your business funding requirements and to be ready for opportunities in the post-coronavirus landscape.
Talk to one of our London business advisers about safeguarding the future of your business or get in touch with me direct using the links below.
Haines Watts is a firm of London accountants, tax and business advisors.