Cash flow and funding considerations in light of government guidance as of 9 November 2020.
Introduction
The Coronavirus outbreak and related government measures have placed significant pressure on companies’ cash flows. This guide looks at both the government measures that have been introduced since the start of the pandemic, as well as additional considerations to bear in mind when deciding how best to manage your finances.
UK Government Measures
Coronavirus Job Retention Scheme
The UK Coronavirus Job Retention Scheme (CJRS) has been extended until 31 March 2021. The CJRS was intended to be replaced by the Job Support Scheme (JSS) on 1 November 2020, but this has now been postponed. The extended CJRS is open to all employers and employees who meet the eligibility criteria, including employers who didn’t claim under the original scheme.
From 1 November 2020, employers will be able to claim up to 80% of any furloughed employees’ wages, subject to a cap of £2,500. Businesses may furlough employees full time or may instead choose to furlough employees part-time (with those employees then still being able to work a proportion of their usual hours). Currently, employers are not required to pay for hours that employees have not worked, although they must cover any employers’ national insurance and pension contributions. This policy will be reviewed in January 2021.
To make a claim, an employee who is being furloughed must have been on their employer’s payroll on 30 October 2020, unless the employee was made redundant on or after 24 September 2020, in which case that employee can be re-employed and claimed for under the CJRS. In either scenario, the employer must have made a PAYE Real Time Information (RTI) submission to HMRC in respect of that employee at some point between 20 March 2020 and 30 October 2020.
HMRC has stated that it intends to publish details of any employers that claim under the extended scheme from December onwards. The Job Retention Bonus (JRB) that was previously announced in respect of furloughed employees who remained in ‘meaningful employment’ until 31 January 2021 has been scrapped, as the purpose of the JRB was to incentivise employers to retain employees until the end of January 2021. However, as the extended CJRS will operate until the end of March 2021, this incentive is no longer necessary.
How to apply
Claims under the extended CJRS can be submitted to HMRC via the online portal from 8am on Wednesday 11 November 2020. HMRC typically reimburses employers within 6 working days of a claim being made.
Coronavirus Business Interruption Loan Scheme (CBILS)
The British Business Bank is supporting start-ups and SMEs that are looking to access loans, overdrafts, invoice finance and asset finance (of up to £5m) in order to maintain safe cash flow levels during the COVID-19 pandemic. This will enable businesses, with a UK base and with turnover of no more than £45 million per annum to borrow with the first twelve months of finance interest free.
The CBILS has been extended until 31 January 2021.
How to apply
UK Businesses with a turnover of no more than £45 million can apply for the CBILS. More than 40 accredited lenders are currently participating in the scheme and businesses have been encouraged to contact their usual lender / banking partner in the first instance.
The BBB has confirmed that under the scheme, lenders will not be permitted to take personal guarantees of any form for loans of less than £250,000. Personal guarantees may be taken for loans over £250,000 at the lender’s discretion, however:
- lenders will be prohibited from including directors’ principal private residences as part of such personal guarantees; and
- in an insolvency situation, recovery under personal guarantees must be capped at a maximum of 20% of the balance outstanding after the proceeds generated from the sale of any remaining business assets have been applied.
Further details on how to apply for the scheme and for other information can be found on the British Business Bank website.
Coronavirus Large Business Interruption Loan Scheme (CLBILS)
The Coronavirus Large Business Interruption Loan Scheme is designed to support mid-size and larger businesses with turnovers exceeding £45 million and it has now been extended until 30 November 2020. The maximum aggregate amount that can be borrowed by way of term loans and overdrafts under the CLBILS is £200 million (subject to certain conditions) and the maximum size of any invoice financing and asset finance facilities is £50 million. The same rules regarding personal guarantees applies to the CLBILS as for the CBILS.
How to apply
The scheme is available through a series of accredited lenders, which are listed on the British Business Bank website.
Corporate Financing Facility (CFF)
The Bank of England has established a Corporate Financing Facility Fund (CFF) which will purchase ‘commercial paper’ to help support larger firms with cashflow issues. ‘Commercial paper’ is an unsecured, short-term debt instrument issued by a company.
The CFF will offer financing on terms comparable to prevailing markets (benchmarking against the period prior to the COVID-19 economic shock and taking into account borrower credit ratings) and to firms which can demonstrate they were in sound financial health prior to the COVID-19 outbreak.
Bounce Back Loan Scheme (BBLS)
The “bounce back” loan scheme is designed to help small businesses cope with COVID-19 disruption. Small businesses are able to borrow between £2,000 and £50,000, capped at 25% of their annual turnover, with the loans being 100% backed by the government. These loans are interest-free for borrowers for the first 12 months.
The scheme is specifically aimed at fast-tracking debt funding for small businesses that are ineligible for the Coronavirus Business Interruption Loan Scheme. It is understood that funds reach borrowers’ accounts within 24 hours of their applications being accepted.
The BBLS has been extended until 31 January 2021.
How to apply
There are currently 11 lenders participating in the scheme, including the main retail banks. Applications for the Bounce Back Loan Scheme must be submitted via a short standardised online application, which is available from each lender’s website. Details of participating lenders can be found on the British Business Bank website.
Future Fund: Convertible Loans
The Future Fund is a government-backed loan scheme that is centred on “convertible loans” that will automatically convert to equity at a 20% discount upon the occurrence of certain events (e.g. the launch of a new funding round). If such events don’t materialise, it is up to the investors and the government whether to seek repayment of the loan (at a 100% premium) or to convert the loan into equity at a discount of at least 20%.
Funding is available on a first-come, first-served basis to UK-based companies wishing to borrow from £125,000 to £5 million. The scheme will only allocate loans if the value of those loans is matched pound for pound by private investors.
In order to qualify, a business must fulfil all of the following criteria:
- Have raised at least £250,000 in equity funding from third party investors within the last 5 years;
- Have incorporated as a UK limited company as of 31 December 2019;
- Have at least half of its employees based in the UK or half of its revenues deriving from UK sales; and
- Be the ultimate parent company of their corporate group (if they are part of a group).
The maximum term for loans under the scheme is 36 months and funding secured under the scheme may not be used to repay other loans, or to pay bonuses, dividends or advisory fees for the next 12 months. It has also become clear that any matched equity funding will not be eligible for EIS relief.
The Future Fund application deadline has recently been extended until 31 January 2021.
Start-up Loans
Start-up loans can be a good option for businesses that have a limited trading history or have not yet generated profit, as such businesses would not qualify for the Coronavirus Business Interruption Loan Scheme.
The government backed start-up loan scheme is suitable for small businesses wishing to borrow from £500 to £25,000 per director (capped at £100,000 for companies with 4 or more directors). These loans take the form of business loans, which are repayable over 1 to 5 years with a fixed interest rate of 6%. Free mentoring for 12 months is also available for eligible borrowers.
No personal guarantees are required under the scheme, but if the (borrowing) business does not succeed, then the directors become personally responsible for repaying any outstanding sums over the remaining term of the loan.
How to apply
You can check your eligibility and submit an application through a variety of websites.
Statutory Sick Pay Rebate Scheme
Small and medium-sized businesses (with fewer than 250 employees) can reclaim up to 2 weeks’ of statutory sick pay for employee sickness absences related to COVID-19.
From 13 March 2020, where employees need(ed), or wish(ed), to self-isolate, their employers will be reimbursed by the government in respect of payments of statutory sick pay made from the first day that such employees commenced self-isolation and consequently became unable to work (up to a maximum of 2 weeks’ statutory sick pay). The government has not announced when this scheme will end.
How to apply
Employers can claim back statutory sick pay paid to employees as a result of COVID-19 using the government’s online portal (claims will usually be paid within 6 working days). Records must be kept for at least 3 years after the date on which such payment is received.
Business rates holiday for retail, hospitality and leisure businesses
Businesses operating in the retail, hospitality and leisure industries in England will be exempt from business rates for at least 12 months and this will apply to the tax year 2020 to 2021 tax year.
Eligible businesses include shops, restaurants, cafes, drinking establishments, cinemas, live music venues, leisure facilities, hotels, guest and boarding premises and self-catering accommodation. If your business received the retail discount in the 2019 to 2020 tax year, you will be rebilled by your local authority as soon as possible.
How to apply
No action is required. Applicable changes will automatically be applied to your next council tax bill in April 2020. If you have not received a rebate then please contact your local authority in the first instance.
Small Business Grant Fund & Retail Hospitality and Leisure Grant Fund
The government has also made available grants of:
- up to £25,000 for retail, hospitality and leisure businesses that are responsible for paying business rates in respect of properties with rateable values between £15,000 and £51,000; and
- up to £10,000 for all business that qualify for small business rate relief (SBRR) or rural rate relief (RRR).
Businesses that don’t pay business rates are not included in this scheme. Those eligible for the grant must have been the ratepayer – according to the billing authority’s records – on the 11 March 2020. Businesses with a rateable value of £51,000 or over are not eligible for this scheme, nor are businesses that are not ratepayers. Further, businesses that were in liquidation or dissolved as of 11 March 2020 will not be eligible.
How to apply
No further action is required. Local councils will contact applicable businesses directly.
Local Restrictions Support Grant
On 5 November 2020, a new national lockdown came into effect. The lockdown is expected to last until 2 December 2020. Businesses required to close as a result of the new restrictions may apply for an additional grant from their local authority provided that they occupy a property with a rateable value. The grants available are:Up to £1,334 (or £667 for each 2 week qualifying period) for properties with a rateable value of up to £15,000;
Up to £2,000 (or £1,000 per 2 week qualifying period) for properties with a rateable value of between £15,000 and £51,0000;
- Up to £1,334 (or £667 for each 2 week qualifying period) for properties with a rateable value of up to £15,000;
- Up to £2,000 (or £1,000 per 2 week qualifying period) for properties with a rateable value of between £15,000 and £51,0000;
- Up to £3,000 (or £1,500 per 2 week qualifying period) for properties with a rateable value of over £51,000.
Local authorities will also receive funding for a discretionary “Additional Restrictions Grant” to support businesses.
How to apply
For further details on the application process, visit your local authority’s website.
Local Authority Discretionary Grant Fund
Small and micro businesses that have fixed property costs and are not eligible for the Small Business Grant Fund or the Retail Hospitality and Leisure Grant Fund may be eligible for a discretionary grant from their local authorities.
Eligible businesses include small businesses that were trading on 11 March 2020, have high ongoing fixed property costs and occupy a property with a rateable value or annual mortgage / rental payments below £51,000.
Priority will be given to local businesses that share offices or flexible workspaces, market traders, bed and breakfasts and properties used by charities. As suggested by the name, the fund is discretionary and local councils will provide their own guidance around how they intend to allocate funds under the scheme.
How to apply
For further details on the application process, visit your local authority’s website.
Grant Funding: Technology & R&D Businesses
A further £750 million government funding package has been made available via Innovate UK to provide targeted support to technology and research-focussed business.
How to apply
Businesses that focus on research and development , can apply here.
Deferral of VAT payments
The deadline for VAT payments relating to Q2 2020 has been deferred until the end of the tax year, meaning that businesses will have until April 2021 to repay their VAT liabilities that arose in respect of the period running from 1 April to 30 June 2020.
On 24 September 2020, it was announced that businesses who deferred their VAT liability will now have the option to pay in smaller instalments – interest free – up to the end of March 2022.
Please note that the VAT payment deferral payment ended on 30 June 2020, so businesses that have taken advantage of this scheme should set up any cancelled direct debits in time for the next VAT payment quarter and ensure that future VAT returns are submitted and paid as normal.
How to apply
VAT payment deferrals will be processed automatically, so there is no need to apply. However, businesses that normally pay their VAT by direct debit should cancel their direct debits with their banks if they want to take advantage of the deferral (otherwise the payment might be automatically debited).
HMRC Time To Pay (TTP) Scheme
HMRC is affording businesses and self-employed individuals additional time in which to pay their taxes, if they are in financial distress as a result of COVID-19. These payment deadline extensions – currently being referred to as “Time to Pay Arrangements” – will be dealt with on a case by case basis, with the outcomes depending on the circumstances.
How to apply
For more information, please call the HMRC Coronavirus Helpline: 0800 024 1222 (open Monday to Friday 8am to 8pm, and Saturday, 8am to 4pm).
Non-Government Measures
Reducing Overheads
In addition to the government support provided, businesses should constantly assess at whether they can save cash by reducing overheads more generally:
Salaries
The largest overhead typically facing most businesses is wages. Rather than being made redundant, workers may be willing to take temporary pay cuts and/or work reduced hours during the crisis, in the knowledge that this could provide greater job security in the long run (by helping to ensure the employer remains solvent). Businesses may also consider alternative ways of incentivising employees, for example by setting up employee share option schemes.
Recurring expenses
Businesses should also monitor their other regular expenses and consider whether there are ways to reduce these or to defer payment deadlines. For example, it may be that monthly spend on Google AdWords or other marketing activities could be reduced for a period of time, given that consumers may be less likely to buy certain products or services at this time anyway.
In addition, regular subscriptions or services that are no longer needed (or cannot be fulfilled by the provider) should also potentially be put on hold, for example office cleaning services or fruit/milk delivery services.
Rental payments
It may also be worth considering speaking to your landlord to agree a rent-free period, reduced rental rates and/or extended payment deadlines.
Capital expenditure
Consider delaying or decreasing all unnecessary expenditure, for example capital expenditure. As part of this process, businessess should carry out a careful audit of their income and outgoings to identify possible opportunities for cost savings or improvements.
Selling assets
Depending on the nature of the business, it may be possible to sell unnecessary assets to raise cash. However, adecision to do so should follow careful consideration of any existing loan agreements, security arrangements and shareholders’ agreements, as such agreements may restrict the business’ ability to dispose of its assets.
Loans / Creditors
As well as facing potentially large tax liabilities and employee overheads, many businesses will likely also have existing financing or credit arrangements in place with lenders or suppliers. Meeting these additional liabilities may also become increasingly difficult, especially if existing customers cease making purchases, cancel subscriptions or struggle to pay invoices on time.
The knock on effects of such disruption to cash inflows will inevitably affect the ability of businesses to keep up with their required cash outflows. It is therefore important that management teams constantly assess their cash positions and have in place a strategy for managing cash flow should the situation worsen.
If you are experiencing cash flow issues, the first port of call should be opening a transparent line of communication with the relevant creditors (e.g. suppliers or lenders). At this point in time, they may well be facing their own cash flow shortfalls and having conversations internally to work out how best to proceed. After all, joint consensual measures typically work far more effectively than one party unilaterally acting solely in its own interests.
Businesses should consider delaying any planned voluntary prepayments under existing loan agreements, as it might be safer to save the cash now and instead use it to make all contractually required payments in the long-term.
Customer Retention
Given the global scope of the crisis, cash flow issues are impacting almost all sectors and countries. As the squeeze on cash tightens, the natural instinct for customers is to cease making unnecessary purchases and cancel unnecessary services or subscriptions. However pre-empting this and offering customers payment holidays or opportunities to temporarily suspend their subscriptions can often result in a far better long-term outcome.
It is likely that the Coronavirus outbreak will end at some point, and when this time comes, it will be far easier (and cheaper!) to try and restart commercial relationships existing customers, then to have to invest in acquiring those customers once again from scratch. To that end, there also evidence to support the notion that once a subscription has been cancelled, it can be far more difficult to persuade a customer to re-subscribe, as they may have since realised that they can ‘cope’ without the service.
Credit control
In addition to the above, businesses should continually review and prioritise customer credit control, particularly if they rely on only a small number of customers. As part of this process, businesses should strive to invoice customers quickly and accurately to help reduce the likelihood of problems and delays arising.
Businesses should also carve out time to assess the creditworthiness of prospective customers before agreeing to work with them. In this context, businesses could try to achieve some level of cash flow certainty by offering discounts to existing customers that pay quickly, and requiring new customers (i.e. customers with no payment history) to pay upfront.
Businesses could also try to negotiate more favourable credit terms with trade partners and suppliers. For example, if a business is currently required to pay its suppliers within 30 days, but gives its customers 60 days to pay, there is a period of 30 days during where the borrower might have paid out significantly more money than it has received.
Under such circumstances, aliging the payment terms agreed with both suppliers and customers (e.g. by extending payment deadlines with suppliers and/or shortening payment periods for customers) could help to aleviate cash flow issues.
Alternative Forms of Payment
Whilst cash is king, there may be some suppliers that are happy to be paid in non-cash consideration. One example would be to pay suppliers in options or equity in lieu of cash. Whilst this may not be satisfactory for all parties, if there is a good chance that the issuer will recover well following the crisis, then suppliers may conclude that the potential upside could outweigh the risks.
This short guide has been prepared for directors and owners of private limited companies for information purposes only, in particular to provide a summary of key government guidance and initiatives provided to support small businesses in light of the COVID-19 pandemic. This guide does not constitute legal advice and should not be relied upon, especially given the fact that government guidance and initiatives are being updated and amended on a daily basis. For specific queries and any further information, please contact Ignition Law for advice relating to your particular circumstances.
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