Surviving, thriving, diversifying

Business survival means managing cash. For some, taking out loans or credit facilities can stave off  disaster. But do they merely put off  insolvency?

Debt management can, if done correctly, do more than just allay collapse in the short-term, but help companies thrive. The amount of planning and stress-testing to accompany what can feel like an infinite number of scenarios thrown up by Brexit may, ironically, have put some companies in good stead.

“Bizarrely in the UK, the political scene and uncertainty meant companies were already bracing for potential implications from Brexit,” explains Blair Nimmo, partner and global head of insolvency at KPMG UK. “In the last three years businesses were already cautious and preparing for a potential fallout,” he adds. As part of this preparation many ensured their cash-flow forecasting was up to date.

“Forecasting is like creating a map,” says Duncan Swift, president of insolvency professional trade body R3. “It will help address the obstacles and ways to navigate them, for example government support mechanisms and whether your business can make better use of them.” 

There are several tools at the disposal of restructuring experts. An adviser will take you through the options available, including the incoming Insolvency Moratorium. Due in early July, it will allow businesses 20 days to draft a rescue plan, during which time no creditor action can be taken. An insolvency practitioner is appointed as a ‘monitor’, to oversee the plan and extend the moratorium, if necessary, or bring it to an end if a rescue is not viable. 

Insolvency processes aside, the Coronavirus Business Interruption Loan (CBIL) allows companies to borrow up to £250,000 with 80% of it government-backed. No personal collateral is required and the first 12 months are interest free. Access to specialist lending is another area, including: floating charge lending, such as borrowing against work in progress; and stock lending based on future stock value. 

However, the government gives with one hand and takes away with another. It announced in 2019 it would change the insolvency repayment pecking order so HMRC would supersede lenders if a company collapsed. This means the appetite from specialist lenders rapidly declined. HMRC announced it would delay this implementation but it is not clear if lenders taking a risk during the pandemic will be subject to the superseding rule should a company collapse later. 

To counter this, the Bank of England has reduced the base rate to 0.1% and is discussing moving to negative percent to stimulate lending. Pre-Covid there was appetite from investors looking to house their funds and that appetite hasn’t ended because of coronavirus, says Nimmo, adding there are many “opportunities” still around.

Investment aside, cutting costs is still one of the first measures a company will look at in times of financial hardship. Furloughing staff  is one way to ensure staff  retention and removing that payroll cost, with some companies asking remaining employees to take temporary pay cuts.

Martin Brown, managing director, My Management Accountant, also suggests speaking to landlords about possible rent reductions: “Will the business need as big an offi ce in future or could it reduce on a permanent basis?” Re-engaging with suppliers and finding new pay structures such as part-payment is another suggestion Swift makes. 

There are, of course, an array of options to help during these tough times, but the change in mindset is just as important and shouldn’t be overlooked, offers Brown, who runs a peer-support group for local businesses.

“There is a psychology shift changing people’s attitude to risk which is helping to push boundaries so businesses can continue,” he says. Businesses which previously spent their time “firefighting” now have distractions removed and can be their own consultant.

“You previously had to pay to look at your company, “ explains Brown. “You can be that consultant and find those efficiencies and improvements”. 

Rachael Singh is a freelance journalist