Business Support

Aside from the various rate reduction schemes, grants linked to the occupation of business premises, the furlough scheme and the Self-Employed Income Support Scheme, all other sources of government support for SME’s are a bewildering array of government backed loan schemes.

As we said in a post last week, a cash grant (treated as income) is better than a bank loan (treated as a repayable liability).

By offering these loan guarantees, government is shifting the support it is offering from current expenditure to some future date when and if banks are forced to call in the government guarantees.

By taking the loans, businesses are increasing their costs – after discounting any initial government assistance – and adding loan repayments to their cashflow forecasts.

Another way to consider this latter point means that businesses will need to make more profit to cover the interest costs, and more importantly, generate additional profits to fund the loan repayments.

Which is why planning prior to taking out loans is paramount. 

This planning process will serve two functions:

1. Provide you with the evidence that a loan can be managed, and
2. Provide you with a report to support your loan application.

If you cannot claim COVID-19 generated grants, and need to plug your cashflow gap with a loan and are unsure how to undertake the necessary forecasting process, please call.

An income stream is a fanciful term to describe a source of income. This post examines the value of creating more than one source of income as opposed to relying on just one source.

First, a cliché, placing all your eggs in one basket…

This analogy, that if you drop your basket (lose a sole source of income), then all your fragile eggs are likely to be broken due to this single action.

Counter this with a basket that contain an egg and a piece of cheese. Drop this basket and you may lose your egg, but you can still benefit from the cheese.

The current rapid and discriminatory lock-down that has forced the closure of leisure, retail and many other firms, has basically placed their owners in the position of the egg basket handler, staring in dismay at the shattered remains of their ability to sustain themselves.

Whilst the distress and uncertainty that this process has created cannot, and should not be underestimated, perhaps it does open up space to consider future options including the possibility of creating more than one income stream.

Consider Joe, a driving instructor until social distancing left him without a business, who now drives local deliveries for a supermarket chain and fully intends to continue this post COVID-19. He plans to reopen his driving instructor business evenings and weekends and has already started selling craft products on the internet.

Instead of eggs in his basket, he now has eggs, cheese and bacon…
 

The Government has launched a raft of grants and loan guarantee arrangements since the COVID-19 lock-down started last month.

In almost all cases the grants are taxable and non-repayable, unless HMRC at some future date consider that the grants were claimed fraudulently.

Grants are treated in your accounts as other income.

Loans are an obligation to repay. Even if the Government guarantees 80% of loans taken out, the loans received are classified as liabilities not as other income. You will be expected to repay the full amount borrowed and cover interest payments – once any Government agreement to cover interest and charges has expired.

The scope of the Coronavirus Large Business Interruption Loan Scheme (CLBILS) was expanded by the Chancellor ahead of the scheme launch on 20 April 2020. The scheme enables banks to make loans to firms with an annual turnover of over £45 million. Businesses with a turnover exceeding £500m were not originally eligible to use the scheme. This will allow more firms to be able to benefit from this government support.

Qualifying businesses can apply for up to £25 million if their turnover is between £45 million up to £250 million and for up to £50 million if turnover exceeds £250 million. Facilities backed by a guarantee under CLBILS will be offered at commercial rates of interest from three months to three years.

Under the scheme, the government will provide commercial lenders with an 80% partial guarantee on individual loans for businesses that would be otherwise unable to access the finance they need at this critical time.

Personal guarantees of any form will not be taken for facilities below £250,000. For facilities of £250,000 and over, claims on personal guarantees cannot exceed 20% of losses after all other recoveries have been applied.

Lenders will still be expected to conduct their usual credit risk checks, but this scheme allows them to specifically support business that were viable before the COVID-19 outbreak but are facing significant cash flow difficulties that would otherwise make their business not viable in the short term.

The new scheme supports a range of finance products including short term loans, overdrafts, invoice finance and asset finance.

The government has announced that more than 1,000 fishing and aquaculture businesses in England will receive direct cash grants through a new fisheries support scheme.

The scheme will make available grants of up to £9 million for eligible fishing and aquaculture businesses. These measures will help support businesses with small to medium-sized boats up to 24 metres in length with fishing licences registered in England who recorded sales of £10,000 or more in 2019.

The majority of the fish caught by these fishermen is usually for export and the price and customer base has been slashed. The new scheme will run for up to three months and will focus on helping English fishing and aquaculture businesses with their fixed costs such as insurance, equipment hire and port costs.

A further £1 million will be made available to support projects to assist fishermen to sell their catch in their local communities. This money is expected to help fishing businesses find new ways to market and sell their catch while traditional markets are restricted.

The seafood and fisheries sectors can also apply for the existing support available for businesses, including the Coronavirus Business Interruption Loan Scheme and the Coronavirus Jobs Retention Scheme.

The government has announced a new £1.25bn scheme to help innovative firms survive the coronavirus pandemic.

The package is made up of:

• £500 million investment fund for high-growth companies impacted by the crisis, made up of funding from government and the private sector, called the Future Fund.
• £750 million of grants and loans for SMEs focusing on research and development.

The £500 million Future Fund will be delivered in partnership with the British Business Bank and launched in May. The loans will provide between £125k and £5m from the government, with private investors at least matching the government commitment. These loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid. Qualifying businesses must be an unlisted UK registered company that has raised at least £250k in equity investment in the past five years. The government is committing £250 million in funding towards the scheme, which will initially be open until the end of September.

The £750 million of targeted support for the most R&D intensive small and medium size firms will be available through Innovate UK’s grants and loan scheme. This will include up to £200 million of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. The first payments are expected to be made by mid-May.

The Chancellor of the Exchequer, Rishi Sunak, has announced today (17 April 2020) that the Coronavirus Job Retention Scheme is to be extended by one month until the end of June. This announcement will help provide many businesses with more certainty at this very difficult time. This change follows the extension to the nationwide Coronavirus lock-down measures until at least 7 May 2020 that were announced on 16 April 2020.

The scheme was first announced last month and was originally intended to run backdated from 1 March for 3 months until the end of May. The scheme is designed to help employers furlough their employees with significant government support payment cash grants of up to 80% of their wages to a maximum of £2,500 per month.

The Chancellor of the Exchequer, Rishi Sunak, said:

'We’ve taken unprecedented action to support jobs and businesses through this period of uncertainty, including the UK-wide Job Retention Scheme. With the extension of the coronavirus lockdown measures yesterday, it is the right decision to extend the furlough scheme for a month to the end of June to provide clarity.'

The government has confirmed a number of important of announcements regarding the eligibility requirements for using the Coronavirus Job Retention Scheme and the opening of the online portal for applications.

1. The date on which employees can be placed on furlough has been changed to 19 March 2020. This means that employees who were on the PAYE payroll of their employers on or before 19 March 2020 will be eligible to receive support through the Coronavirus Job Retention Scheme. The original eligibility date was 28 February 2020. The new date is fixed at the day before the scheme was originally announced by the Chancellor and is therefore unlikely to be changed again to protect the government against fraudulent claims.
2. Employees who were employed as of 28 February 2020, and on payroll, who were made redundant or stopped working for the employer after that and prior to 19 March 2020, can also qualify for the scheme if they are re-employed and placed on furlough.
3. It has been confirmed that the online claim service for the Coronavirus Job Retention Scheme will be launched on Monday 20 April 2020. The only way to make a claim will be online.

It is expected that claims will be paid within six working days. HMRC have requested that you do not contact them unless absolutely necessary.

Once the present lock-down is eased, those businesses that have manged to weather the disruption will be eager to start selling.

Sales will be the indicator that receives the most attention; sole-traders, partners and directors will be out of their starting blocks to be the first in their market sector to secure deals.

There will the temptation to relax terms and conditions in order to win these early sales. For example, firms could offer their customers 90 days to pay their bills in order to convert sales.

Ironically, if businesses are successful in winning new sales, those that are most successful will be in danger from overtrading. Even if the sales produced are profitable on paper, a business can still go under if it trades its way out of cash, out of liquidity.

How can this happen?

During lock-down, many businesses will be faced with paying fixed costs – rent for example – even if turnover has reduced or been eliminated due to Coronavirus disruption. Government schemes to assist with rates and payroll costs will help, but many businesses will be loss making.

These losses will reduce cash reserves and in some cases, firms will be obliged to lend money to fund these losses; if they want their businesses to survive.

When we come out of lock-down, and sales pick-up, it may be some time before these sales actually reach our bank accounts, especially, if we are tempted to offer extended credit in order to win sales.

Consequently, the extra sales may not generate cash inflows at a fast enough rate to meet current costs, and as most businesses will be entering this post lock-down period with depleted or exhausted reserves, unpaid creditors including your bank, may enforce a close-down in order to part recover their unpaid bills and loans.

This is overtrading and the way to avoid it is to adopt rigorous cash-flow management. This is a process that you can start now, before any upturn. If you need help designing the necessary spreadsheets, please call, we can help.