Avoiding the cliff edge

Alarm bells have been sounding. Warnings of widespread failure among the 1.4m UK small businesses that borrowed cash to see them though the pandemic have been getting louder.

Fears have been expressed that thousands of zombie companies are being created surviving but without resources to invest or grow.

In a move to see off those fears chancellor Rishi Sunak announced in February that businesses were getting more time to repay their government support loans.

His hope is the greater flexibility will give businesses more “breathing space to get back on their feet”.

Around £45bn has been borrowed under the government’s Bounce Back loan scheme, which offers loans of up to £50,000.

The Treasury outlined “pay as you grow” flexible terms last September. The tweaks to the scheme that have now been announced will give companies the option to extend the length of their loan from six years to ten.

Business can also opt to make interest-only payments for six months, with the ability to use this facility up to three times throughout the loan. They can also opt for an additional six-month ‘buffer’ before making their first payment.

That move means that, along with the initial 12-month interest and repayment holiday, businesses will have 18 months before having to start paying back.

Communication is critical. No banker likes surprises, especially if it’s bad news

The changes announced by the chancellor come as more than 600,000 companies that took advantage of the scheme when it first opened were due to start repaying their loans in May.

Large numbers of Lancashire businesses have taken advantage of the bounce back loans and the governments Coronavirus Business Interruption Loan Scheme (CBILS).

Under the latter, businesses have been able to access up to £5m of loans and other finance, including overdrafts and invoice finance.

The government guarantees 80 per cent of the finance to the lender and it pays interest and any fees for the first 12 months. The business remains liable for repayments of the capital.

Whatever the funding, financial experts say it is vital that businesses manage their situation and act early if there are signs of difficulties.

Ian McCulloch, partner at business rescue and recovery specialist Begbies Traynor, based in Preston, says an estimated 70 per cent of Lancashires SMEs benefited from the Bounce Back and CBILS schemes.

He says: While the vast majority of these loans will have been taken out in good faith, few would have predicted the Covid pandemic, and associated restrictions on trade, to continue for so long.

As we approach a second spring under a national lockdown, many are still experiencing disruptions to trade, as well as struggling with the uncertainty over how much longer these restrictions are likely to be in place.

And he adds: If you foresee your company having problems in making the necessary repayments to your CBILS or Bounce Back Loans in the coming months, you need to ensure you are having the right conversations with the right people. Talk to your lender about what they can do to help.

John Jones, partner and head of corporate finance at accountants and business advisors Beever and Struthers in Blackburn, says in the past year companies have taken on unprecedented levels of debt.

He adds: Cash is king and the lifeblood of any business. Successful cash management involves controlling your costs while collecting income as soon as possible.

Unfortunately, it’s not always that straightforward. As the furlough scheme is scheduled to end in March, many businesses face the prospect of a nasty jolt to their cost base.

He believes that businesses that have not sought support should consider it, even at this late stage.

John says: Lending terms may never be so favourable again, and you can always give it back when things normalise. While the main clearing banks seem to be focused on existing customers, the challenger banks and non-bank lenders are actively seeking new customers.

When it comes to managing loans and funding, he says it is vital to keep on top of the numbers. Up to the minute information is vital to address potential problems before it’s too late, he explains.

Cashflow should be monitored daily, weekly, monthly. Simple housekeeping and credit control techniques can have a positive effect on cashflow in most businesses.

He adds: Communication is also critical. No banker likes surprises, especially if it’s bad news. It’s important to keep them informed.

There’s usually a good reason if cashflow isn’t what you expected and your banker needs to understand that and your plans to address the issue.

It’s too easy to say my banker doesn’t understand my business but it’s a two-way relationship and you need to help them so they can support you. It’s all about an open, honest dialogue.

Andy Traynor is based at FW Capital’s Preston office. It primarily makes loans to established SMEs in Lancashire and Cumbria from the £102m NPIF Debt Finance Fund.

He says: Businesses should be refreshing and revising their business plans: assessing new risks based on what is now known but may not have been known when they took out their original loan.

They should refresh and review their cash flow to ensure that capital repayments can be made.

What they shouldnt be doing, he stresses is burying their head in the sand. Banks and funders should be able to offer more support if needed, he adds.

There may have been further effects of Covid since the original loan was taken out, for example the length of time the business has been affected might be significantly longer than first estimated. Further funding might be necessary as a result of this.

Sam Roden, HSBC business banking area director for Lancashire and Greater Manchester, also stresses the communication issue. He says: Keep your bank updated on your performance, and let them know in advance if you think you’re going to have a cashflow problem.

The earlier you discuss potential issues with your lender the more they will be able to do to help you.

He adds: For many businesses 2020 will be the first time that they’ve borrowed money from a bank or other lender. For others it be the first time that their borrowing has been significant and that their bank will be monitoring their performance.

For businesses that were already highly geared, additional Covid support may mean that the bank has concerns, and that their accounts will be subject to close monitoring.

Clitheroe-based software company YUDU secured a £300,000 loan from Rosebud, a fund managed by GC Business Finance, last August to accelerate the growth of its flagship product.

GC Business Finance also delivered a £100,000 loan under the Coronavirus Business Interruption Loan Scheme (CBILS).

Richard Stephenson, chief executive at YUDU, says businesses need to know and understand their figures. He adds: The important thing is absolute transparency with the people who are lending you money.

Agree the reporting system from the start. The first thing we did with our CBILS loan was produce a first monthly report in reasonable detail and to check it was the right format and the information they wanted to see.

Once that is agreed, stick to the format. Consistency is really important. He adds that businesses should not wait until they are at the cliff edge before raising the alarm. You are not going to get help if trust is breaking down. Have the conversations early.

  • For further Lancashire business news, advice and analysis subscribe to Lancashire Business View or join the LBV Hub from just £2.50 per month. Click here to subscribe now.