The COVID-19 pandemic is having a significant impact on businesses and the economy all over the world. In fact, the IMF predicts that the global economy will shrink by 3% this year in the worst decline since the Great Depression. Despite lockdown gradually easing, many businesses are still facing an uphill battle, with 62% of businesses who have continued to trade reporting a lower than normal turnover, whilst 42% have cash reserves to last less than six months.
Despite job retention schemes and a billion-pound recovery plan, many businesses in the UK are facing unprecedented financial difficulty. So, if your business is struggling to survive as a result of coronavirus, what options are available? From government support to refinancing, we investigate the different options in this blog.
Check your financial fitness
First things first, if your business is struggling to survive, it’s important to get a clear picture of your financial situation so you can decide on the right route for you. Start by reviewing your accounts to see who owes you how much and audit your stock to see if any could be freed up to bring in more funds.
You should also carefully review your balance sheets and see what efficiencies could be made to help with cash flow in the future. Assess your business and question each expense: What expenses aren’t essential? Do you need to be in a high rent location? Or could you move somewhere cheaper? Employees can also be a large expense - do they do too much overtime? Finally, it’s always worth liaising with suppliers to see if they can offer a better deal to save you money.
Talk to your creditors
Next up, if you are struggling to pay your creditors because of the coronavirus crisis, you should be open and honest with them. It’s always best to have a conversation with your creditors and let them know where they stand. This way, they will be much more likely to understand and more likely to show goodwill if you let them know there might be potential issues in the future so that they can prepare accordingly.
If you need to raise money for your business, one potential option is crowdfunding. Thanks to the likes of Kickstarter and Crowdfunder, crowdfunding has become increasingly popular in recent years. Both peer-to-peer funding and crowdfunding work on a model that connects businesses with individual and corporate investors using an online platform. Peer-to-peer funding focuses on interest-based lending, whereas crowdfunding is usually equity-based.
You must adhere to the platform’s criteria and most investors will look at publicly available records, such as filed accounts. The platform will verify you, then you must create a unique pitch and show solid ideas to convince investors and eventually come to an arrangement. This is not the best method if you're looking to improve your immediate cash flow problems, but it can help with long-term goals if you need a cash injection.
With invoice financing, lending is organised against the amounts raised on your invoices. Invoice discounting is a type of debtor financing, where a finance company will advance a portion of your unpaid invoices, so you have immediate liquidity, whilst invoice factoring converts outstanding invoices due within 90 days into immediate cash.
Both options are powerful business tools that enable you to raise money from your debtor ledger. The lender will look at your invoices, customer base and your overall business, before deciding how much to lend based on the quality of their risk. They will then provide you with working capital advances against that asset and all of your future invoices will then pass through the system, which can help to improve cash flow.
The finance company will set up a new bank account in your company’s name to collect customer payments and you will then be allowed to ‘draw down’ those funds. So, if you issued an invoice for £2,000 plus VAT (£2,400) you could sell this invoice to an invoice finance company for 75% of the value of £2,400, giving you £1,800 to draw down. This is an excellent solution for small businesses because it can help the company grow, it is relatively inexpensive and the risk is low.
If you are currently struggling with cash flow as a result of the COVD-19 pandemic, it’s also worth looking at your assets because you might be able to free up some cash by financing them. Business assets can form collateral for lenders to secure themselves against; these assets can include property, machinery or stock, and used in conjunction with other methods such as factoring, this method can provide a package of new finance to overcome distress.
Alternatively, directors’ loans are another solution for businesses in financial distress. This is where directors raise funds privately that can then be loaned to the business. However, there is a risk involved and if the company is insolvent, repaying your loans in advance of your creditors may contravene the law. What’s more, you could create a potential preference (as per Section 239 of the Insolvency Act) if you put money into an insolvent company and then pay yourself back ahead of other creditors.
Access government support
The government has also released a range of business support measures for UK businesses during the coronavirus pandemic in a bid to boost the economy and limit economic downturn as much as possible. If, despite the above solutions, your business is still struggling, support options available from the government include:
Coronavirus Job Retention Scheme
The Coronavirus Job Retention Scheme enables businesses to access funding for staff who are not active in the business by transferring them to the Coronavirus Job Retention Scheme. All UK employers are eligible, and it means that businesses can have help paying employees’ salary for those who would otherwise have been laid off. These employees are designated as ‘furloughed workers’ and HMRC will reimburse 80% of wage costs up to a maximum of £2,500 per month.
The scheme has been extended until the end of October 2020, with 80% support guaranteed until the end of July. After that, companies will begin to pay National Insurance Contributions (NICs) and pension payments from August, and they will then pay for 10% of wages from September and 20% from October. Furlough flexibility also began on 1st July, enabling staff to be brought back on a part-time basis.
Business rates holiday
Another solution available is the 12-month business rates holiday for retail, hospitality, leisure and nursery businesses in England for the 2020/2021 financial tax year. And the good news is businesses don’t need to do anything to claim this - it automatically applies.
Time To Pay
If you are struggling to pay your tax as a result of the pandemic, you might be eligible for tax support through HMRC’s Time To Pay service. However, it’s important to note that arrangements are agreed on a case-by-case basis and tailored to individual tax liabilities and circumstances.
Coronavirus Business Interruption Loan Scheme
Businesses with an annual turnover of up to £45m may be able to access funding of up to £5m via the Coronavirus Business Interruption Loan Scheme (CBILS). The scheme was launched primarily to support small and medium sized businesses to access bank lending and overdrafts, and as part of the scheme, the government is providing lenders with a guarantee of 80% on each loan, giving lenders further confidence to provide ongoing financial support to SMEs.
Bounce Back Loans
Companies are also able to apply for a Bounce Back Loan of up to £25% of their annual turnover for amounts between £2,000 and £50,000. These loans will be both interest and repayment free for the first 12 months and will be 100% guaranteed by the government.
Statutory Sick Pay Recovery
Businesses with less than 250 employees can reclaim the cost of SSP as part of the Statutory Sick Pay Rebate Scheme for employees who have taken 14 days off for isolation due to the coronavirus.
Cash grants of up to £30,000 are available for small businesses depending on rateable values. However, if you pay your rent with rates included you won’t receive any help and will instead have to be billed directly by the rating authority. There are also cash grants for businesses that meet the criteria within the retail, hospitality and leisure sectors (the retail, hospitality and leisure grant fund).
Company Voluntary Arrangement
If you are still facing financial difficulty, it might be worth considering a Company Voluntary Arrangement. A CVA is a business turnaround tool that gives time and space to companies, giving them a chance to recover. Rather than a terminal insolvency procedure, it is a contractual arrangement between a business and its creditors where the business pays back what it can afford in a sustainable manner over a set period of time. After the time period is up, the rest of the debt is written off.
There are a number of benefits to a CVA, including improved cash flow, shareholders can retain control, it’s not publicly announced, it costs less than administration and your creditors have a greater chance of being paid what they are owed.
Seek expert advice
If you are currently facing financial difficulty and your business is struggling to survive as a result of the coronavirus, don’t suffer in silence; McAlister & Co are on hand to provide free help and advice. Our friendly and approachable team are experts in insolvency and turnaround solutions for business and individuals.
So if you need clear, strategic advice about the options available, contact us today. Remember - the sooner you act, the more options will be available to you. You can also contact HMRC’s dedicated coronavirus helpline for further help and advice.