By Nicky Goringe Larkin, Managing Director of Goringe Accountants
On paper the Coronavirus Business Interruption Loan (CBILS) is an extremely attractive form of credit, backed by the government in the form of an 80% guarantee. Unfortunately, the likelihood of gaining access to one of these loans is notoriously low, with reports of less than 1% of enquiries for CBILS resulting in a successful application. Even though banks have been named and shamed by the government and personal guarantees are no longer being asked for loans under £250k, a successful loan application is still a rarity. This is partly because of the stricter criteria that banks are applying and partly because the loan application process time has increased, the volume of applications and the number of bank employees that are currently ill or self-isolating.
According to the IoD seven out of ten businesses owners said coronavirus poses a threat on their future. So, if SMEs are to survive Covid-19 they must consider other ways to preserve cash flow, as cash not profit/revenue is what is going to ensure survival.
There are seven alternative steps businesses can take to help their finances when struggling to secure the government based coronavirus loans:
- Access the grants available
Do this as soon as possible – the Small Business Grants, Self-Employment Income Support Scheme and the Coronavirus Job Retention Scheme.
Small Business Grants are being distributed by local councils, with many having contacted eligible businesses. If your business premises aren’t registered for business rates, your business will not qualify such as businesses based in serviced offices or from home. The criteria is strict so check on HM Government’s Business Support website. The grants should be paid out in April, therefore businesses will not have long to wait. Many of these companies may also be entitled to a business rates holiday if in the leisure/hospital/retail sectors.
The Self-Employment Income Support Scheme is for sole traders (or partnerships) that had less than £50k taxable profit in 2019, or under £50k average between the three tax years 2017-19. HMRC will contact tax payers directly if they fulfil the criteria and the support is supposed to be paid out in June.
The Coronavirus Job Retention Scheme (furloughing) has had significant press, the portal for applying for this scheme is not expected to open until end of April. Although early indications were that the pay outs would be received in April, due to the amount of businesses applying and the fact the system is not live yet, expect to fund your April payrun for your cash flow, and to receive the refund in May.
If you’re entitled to any of the above ensure to process your claim as early as possible.
- Client funding
If you have clients that have not been affected as yet by the crisis and/or have large cash reserves, see if you can negotiate early payment. Some may be happy to help, others may help if given a discount on fees. Equally some of your suppliers may be dependent upon your route to market and may be able to provide extra credit or even cash to help your business through this period.
- Contact your debtors
Assess if your cash flow is at risk by your debtors exceeding normal terms. Talk to all your debtors and understand when they are expecting to pay you. By keeping lines of communication open you can therefore calculate if you are able to be lenient with some debtors without putting the debt at risk, and ensure your customers/clients are open with you. Legal action is a last resort, as you want to ensure repeat business, but equally you don’t want to end up with bad debt that is irrecoverable, therefore you need to understand your customer’s position to make a judgement. Never is it more important for you to have a good credit control process where speaking to customers.
- Check with factoring companies
To find out which clients you may be insured against. If you utilise factoring or invoice discounting facilities you may find that some of your debt is insured.
- Don’t give credit
Especially with any new high risk clients otherwise you may have bad debt. It is very tempting to take on any new client in the current circumstances, however, now more than ever you need to undertake thorough due diligence when taking on new clients to assess if you will give credit terms, or require upfront payment or a deposit.
- Negotiate large payments.
For many businesses their largest payments are staff and rent. Many large businesses have led the way in decreasing their senior staffs’ salaries and/or cancelling bonuses. This of course has to be done sensitively and legally so consult your HR or employment law professional before starting this process, however, if for example a decrease of 30% of management costs can save dozens of jobs, surely that is worth doing? Another large cost is rent and some kind landlords are flexible with payments, or even offering a discount rather than have an empty building, however, always discuss with your landlord payment options first.
- Make the most of the tax deferrals starting with VAT
The government has offered an automatic deferral of VAT payments due up to 30th June 2020. These VAT payments will still need to be paid, however, potentially not until 31st March 2021. If you have any concerns regarding your cashflow for the next 24 months, I recommend utilising this option. Your business will still need to file a VAT return, however, cancel your direct debit in plenty of time to ensure that the payment is not collected. If you are due to a pay your second payment on account for personal tax by 31st July 2020, you also have the option to defer this until 31st January 2021. I also recommend preparing your 2020 personal tax return early, so that you know asap what your January 2021 tax bill will be and can budget accordingly. If you wish to defer other taxes, HMRC will discuss options with you and have transferred extra staff to deal with the increase in calls.
In summary, look at all options possible for preserving cash and finding new ways to raise money. The innovative and adaptable businesses will be the ones that survive this crisis.