In the natural world, only erosion can move a cliff edge. In the distorted, dystopian UK realm of Coronavirus economics, the cliff edge is financial and it shifts at the whim of the government, leaving a trail of confusion and uncertainty behind it for businesses.
The wide variety of business support schemes
It has been difficult to keep track of the many mechanisms the government has put in place to help businesses weather the pandemic storm, never mind the repeated changes to them.
The government-guaranteed loan schemes, which have so far provided funding of over £70bn to more than 1.5m companies were supposed to close in December 2020, applications were then extended to the end of March 2021. The initial interest and repayment holidays were originally for a year, now that can be eighteen months. Full repayment was to be made within six years but this has been turned into a ten year term with flexible repayments through a ‘Pay as you Grow’ system.
The new Recovery Loan Scheme replacement is to help businesses of any size access loans and other kinds of finance so they can recover after the pandemic and transition period. Up to £10 million is available per business. The actual amount offered and the terms are at the discretion of participating lenders. The government guarantees 80% of the finance to the lender. As the borrower, you are always 100% liable for the debt. The scheme is open until 31 December 2021, subject to review. Loans are available through a network of accredited lenders, listed on the British Business Bank’s website.
The furlough scheme for workers has been extended and varied many times as the crisis has waxed and waned. It now runs through to the end of September 2021. The business rates holiday for retail, hospitality and leisure companies was due to end in March 2021, now it has been pushed out to March 2022 but with reduced relief from July. Bans on various forms of landlord rent and lease enforcements have been extended four times, always at the last minute. They are now scheduled to be lifted at the end of June 2021, by which time the British Property Federation estimates rent arrears will have escalated to £7bn.
The use of statutory demands and winding up petitions to collect commercial debts has also been extended to the end of March 2021. That is likely to be deferred again, probably until June, as is the suspension of the Wrongful Trading provisions of the Insolvency Act.
The cash flow cliff edge
The government’s commitment to supporting businesses has been extraordinary in its scale and commendable, but it must end eventually and then the cash flow chickens will come home to roost. All those loans will have to be repaid, but more urgent will be how companies already drowning in debt can possibly find the additional resources to pay down rent, VAT and PAYE arrears. Ongoing trading will also need to be funded, not least replacing inventory sold off to raise cash or which has become out of date.
Whenever the government finally starts to withdraw its support, the cash flow implications will be severe. Uncertainty over the timing is debilitating and businesses can be forgiven for being unwilling to commit expenditure to reopening when every previous ‘roadmap’ has been overtaken by events beyond their control.
Uncertainty and the drop in business investment
There is another equally disturbing downside to the pandemic and the constant changes to the government support schemes. It has not just made forecasting and planning almost impossible, it has also had a seriously negative impact on investment. Data from the Office for National Statistics show that business investment at the end of 2020 was 10.3% lower than a year earlier and there is little sign of recovery yet in 2021. Without investment, there can be no growth and without growth businesses will struggle to generate the profits and positive cash flow they will need to deal with the huge debt overhang they face.
What is the way forward?
The only way to bring some order to this chaotic situation is to undertake a thorough review of the business, covering its commercial prospects and its financial situation. The core of any such exercise must be comprehensive financial forecasts for the business, based on realistic assumptions and including a sensitivity analysis, taking into account a range of possible activity levels and timings. Seeking outside assistance to carry out this vital project may be necessary, but prompt action now is essential to maximise outcomes.
Once this has been done, there is a sound basis for decision making and for implementing an action plan based on those judgments. However, before that process can start, the review must be sense-checked by independent experts who will challenge the assumptions and ask all those uncomfortable questions that owners and management find impossible to ask of themselves.
Key issues in mapping a path to a secure future could include raising additional equity or borrowing facilities, staffing levels, selling surplus assets, premises requirements, expanding or reducing product lines or services, maximising profit margins, customer profitability and risk, supply chain weaknesses, looking for strategic partnerships or acquisitions and exiting through merger or sale. There could be a host of other relevant considerations, depending on the industry sector or the individual company. The use of a formal insolvency rescue procedure such as a Company Voluntary Arrangement (CVA) or Administration to ease cash flow pressures or reduce liabilities to repair the balance sheet may even be necessary.
Are you suffering pandemic challenges?
If your business is facing cash flow pressures either now or when support measures end, or else your balance sheet has been damaged by the pandemic, we will be pleased to assist with expert guidance. We have extensive experience of dealing with these situations. Our ethos is to help and support, not to judge. Please contact one of our Partners at your nearest office.
If you would like to discuss an independent business review for a client or for your business in Kent, please contact our Partner Adrian Dante at our Maidstone Office.