When the UK Government imposed a lockdown on the British economy on 23 March 2020 it had a seismic effect on businesses. Whilst some sectors could continue to trade, trade became anything but normal for everyone. Even if a business itself could trade, there were parts of its supply chain which could not. A business permitted to, and capable of, trade would only be able to trade for as long as stock lasted, or otherwise be prevented from trade.
Big shifts to working from home, remote selling (online) will never revert to the pre-lockdown status. This has found favour with many, and there are plenty of pros and cons to debate from this remarkable and unprecedented period.
This article focuses on a singular issue arising from lockdown: business debt. (Broader economic debt, from furlough and business rate grants, is for another article.)
The UK Government was quick to announce the Coronavirus Business Interruption Loan Scheme (CBILS) which ‘supported’ banks to lend [what appeared to be] the funding businesses needed to cover losses incurred in lockdown. The British Business Bank (BBB), a ‘state-owned economic development bank’ would guarantee 80% of the loan against default leaving the commercial bank with only 20% of the risk. Financial institutions were quickly overwhelmed with applications, not least because bank premises were closed and their staff were working from home.
CBILS finance was not – is not, until 30 September 2020 – anywhere near as simple as the headline promise suggests. CBILS loans are limited to the lower of:
- 25% of 2019 (calendar year) turnover; or
- twice the annual wage bill 0f 2019 (calendar year)
For a company that turned over £2M with a payroll of £600K in the qualifying period the sums would be:
- 25% x £2M turnover = £500,000
- 2 x £600,000 payroll = £1.2M
£500,000 would be the limit of CBILS funding.
CBILS sparked controversy when the commercial banks responded to applicants with offers of their own conventional products ahead of the CBILS offer. This was actually in the small print of the promise: borrowers should have exhausted ‘normal’ sources of finance before applying for CBILS support. As with any loan application, a forecast is required. Forecasts, at the best of times, are based on assumptions about the future. With the economy abruptly contracted to the levels of eighteen years ago in just two months, what assumptions could or would one make about the future?
Consequently CBILS, or the conventional financial products sold instead, is only actually available to companies who could in any case afford finance at December 2019. The notion of more relaxed criteria due to an 80% Government-backed guarantee is largely a mirage. ‘Affording’ finance, even when one would not otherwise need it, requires a couple of basic requirements to be met:
- the money borrowed can earn more than its cost
- the cashflow can stand the repayments
CBILS appeared to be offered to mitigate the distress caused by lockdown but it can only apply to businesses who did not need it but could make good use of it. It could therefore boost them out of lockdown and beyond (to broader economic benefit) but is otherwise useless for those bubbling along until the COVID-19 calamity struck.
After CBILS came the Bounce Back Loans (BBL) of up to £50,000. These are 100% guaranteed by BBB. BBL loans are limited to the lower of:
- 25% of 2019 (calendar year) turnover; or
- £50,000
Online application, self-certified, no forecast required. For most businesses the first they knew of their application success was when the money appeared in their bank account the next day. I know of businesses who would have been laughed out of the bank if they asked for £5,000 before lockdown who suddenly found themselves awash with £50,000. Although the cost (2.5% per annum after one year) is low, the rules set out above still apply: the money needs to earn more than its cost, and the cashflow will need to stand the repayments. Bear in mind: the banks would not have laughed at a £5,000 application out of spite, they would have rejected the application because serviceability (bearing the interest cost and cashflow meeting the repayments) criteria could not be met. And yet… “here’s [up to] £50,000”. Hopefully this, too, will boost small businesses out of lockdown and beyond, to broader economic benefit.
The boiler plate response from banks to companies who failed to secure CBILS funding is to offer BBL. One has to wonder what the banks are smoking when they propose a £50,000 loan to an applicant who demonstrated a need for considerably more. Desperate businesses have taken in the £50,000 ‘consolation prize’ when they, and the bank, know full well that it is wholly inadequate. Businesses in this position are doomed to struggle and probably fail.
One final source of new debt: HMRC. HMRC gave businesses permission to defer tax and VAT payments if they were unable to pay on time, without incurring late payment interest or penalties. Payment of VAT falling due between 20 March and 30 June 2020 can be deferred until 31 March 2021. You must continue to file your VAT return on time, even if you defer payment.
This enabled cash to stay in the business, but has increased the liabilities (creditors) figure on the balance sheet. CBILS or BBL can – arguably should – be used to settle this at the earliest opportunity.
Unless your business is one of the fortunate ones that has been boosted by the lockdown, the extra debt is a threat to your future unless:
- your business could afford to borrow CBILS/BBL amounts last year
- your post-lockdown trading will grow sufficiently to afford the debt
Businesses have been kept afloat by these measures which has the useful political benefit of deferring failure to some time in the future. The HMRC time-to-pay deadline of 31 March 2021 (a whole year after lockdown started) will be a pinch point to watch. The repayment start date for BBL loans, also a year down the line, will be another.
On the face of it, the lesser-spotted CBILS funding and tsunami of BBL have been welcome boosts – but they have stings in their tails. Aside from the debt, there is an even bigger threat to any business that normally prospers from density of staff or customers: so called ‘social distancing’.
It is imperative that this year is properly planned if a business is to survive.
If you would like to discuss the state your business has found itself in as a result of lockdown, please contact me. I will be pleased to help, and have some capacity set aside for pro bono work.