4th May 2020
We recently discussed a wide range of business issues with a panel of practice owners, as well as representatives from the funding and legal sectors, at a virtual round table event. Here are some of the key thoughts that came from the team as well as views from the panel.
General business issues and the threat of insolvency
We are talking to lots of accountants and their clients on a range of concerns. Perhaps surprisingly, our advice in many cases has been that, with the support measures available, business owners should first consider downsizing or mothballing operations before even thinking about an insolvency process. Everyone is in the same boat right now so there is no need to make knee-jerk decisions.
We have a wide range of options that can help businesses avoid insolvency wherever possible and, at the moment, our conversations are much more about triage than treatment.
However, that’s not to say that there aren’t any insolvencies right now. What we are seeing is that businesses that were struggling prior to the onset of coronavirus, and where the directors were worried about the consequences or stigma that might be attached to a business failure, are now concluding that their business is only going to get worse over the coming months and, given all the negatives in the economy currently, there’s no disgrace in admitting defeat.
Whilst many business owners can batten down the hatches now and try to wait till the economy returns to some kind of normality, we are likely to see businesses start to fail once the recovery begins – it’s a historical fact that we see a greater number of insolvencies after a recession. This will be the time that a need for working capital and an ability to manage cash and creditors will determine survival or failure.
Those directors that have taken stock of where they currently are, looked at what changes can be made to the business going forward and managed their cashflow effectively during lockdown will be best placed to come back stronger when the world starts turning again.
Working with HMRC
The view from our Corporate Strategies team, who specialise in negotiating Time-to-Pay arrangements (TTP) with HMRC, was hugely valuable:
- HMRC are taking a more relaxed stance at present, with most enforcement action effectively on hold. This is partly due to political pressure and partly due to their own resource issues as they get to grips with working in lockdown
- They are taking a supportive view where businesses need time to pay current VAT or PAYE as has been widely reported but are also open to revisiting and amending existing TTP arrangements – offering payment holidays if required, and may also include current debt where necessary
- It is anticipated that difficulties will continue once the economy starts to recover and so it should be reasonable to expect HMRC to continue to take a supportive stance with those businesses that will still need some breathing space in order to avoid insolvency
Whenever the current restrictions start to be lifted, businesses will have to adjust to a new norm and may find themselves overstaffed for the new level of activity. Business owners can sometimes find themselves in an impossible position of having too high a wage bill but having insufficient cash to cover the cost of redundancies. Corporate Strategies can help access the government’s RPO loan scheme – an initiative with the main aim being job preservation. This is an unsecured, interest-free loan, with no personal guarantees, to cover the cost of necessary redundancies and thereby help a viable company avoid insolvency.
Access to funding during these difficult times – a bank’s view
We were joined by a manager from one of the major UK banks who is assessing CBILS applications and he shared with us some useful practical advice that could increase the chances of applications being successful. In his experience, while much of this is common sense to accountants, many directors are making things more difficult by not following these steps:
- Provide at least 2 years’ historic financial information and the latest management accounts
- Prepare a cashflow forecast including key assumptions – while this requirement has been widely criticised, and may well be relaxed in future, it is a good discipline for any business – how can you request a bank loan if you don’t know how much you need? If relevant, make sure you consider things like what will happen to salary costs if the furlough period ends and whether a lack of activity on an invoice finance facility during lockdown may affect the availability of draw-downs from future invoicing
- Provide details of cost-cutting measures already taken such as furloughing staff or enforcing salary cuts, negotiating loan repayment holidays with banks and deferment/repayment plans with key creditors like HMRC, landlords and key suppliers
- Finally, the most important factor they have to consider is the underlying viability of the business and its ability to repay the debt. If the business was struggling before coronavirus then it already has bigger issues
Asset Based Lending could be an alternative?
We also had input from our financing division, Reach Commercial Finance, who made the following points:
- Business owners should approach their banks first as a CBILS loan may be available, however Reach can run alongside that process to consider a wider ABL solution that may be more appropriate if the incumbent bank is unwilling to lend or unable to provide additional funding quickly enough
- The newly announced Bounce Back Loans of up to £50,000 may also be a solution for SME businesses that don’t qualify for a CBILS loan
- There are new funders and products coming to the market, for example a number of finance providers who have come up with new offerings such as advancing funding against an HMRC furlough claim
- We work with many businesses who, for a variety of reasons, are unlikely to be able to secure conventional bank funding e.g. challenging trading performance or a recent bad debt. Particularly now, when banks are incredibly busy, there is a risk that a credible offering may not get properly considered and so, having Reach fight your corner should increase the chances of a decent proposition getting taken seriously
Some legal issues
Finally, we had the views from our specialist legal division, LC Legal:
- Even though there is a generally supportive culture at present, some suppliers are taking an aggressive approach and commencing legal action for overdue debts – including efforts to secure payment for all invoices. Legal input may help protect against suppliers claiming for all invoices to be paid, not just those that are technically overdue
- At the moment, business owners may be considering their future options, be that an exit strategy or looking to acquire businesses that may have struggled once the economy starts to recover. The team at LC Legal are able to help with a whole range of sale transactions should the need arise
We’re here to help
Based on the issues we discussed at this event and the conversations we’ve been having with many professional advisers and business owners recently, it clearly remains a challenging time for all. If you feel any of our team of specialists can help then don’t hesitate to get in touch with your local Lifecycle contact