COVID FAQs for Small Businesses - Stewart Morrin (Updated May 1st 2020)
Commonly asked questions relating to the business impact of COVID-19
Stewart is the Head of Finance here at Volcano Coffee Works and has had the unenviable task of deciphering the middle ground between government support, business conditions and financial stability. We've asked him to answer the more commonly asked questions coming our way. Feel free to submit your own.
The Government will support you
- The UK can’t afford for all small to medium businesses/SME’s to go bust – together we employee around 60% of the UK population so the support systems out there will eventually have to be bent by the government to enable the survival of SME’s (or most SMEs). The cost of not doing so far outweighs the cost of backing small businesses through this time.
Time is money
- If your business can stay in a “hold” state, i.e. talk to suppliers and try to put off paying bills for as long as possible, then it will give you time to think through all options available and make the most informed decision to give your business the best chance of long-term survival. Each week the details around loans, grants etc are becoming clearer, with payments starting to come out from local councils and banks.
Don't make panic decisions
- Don’t rush into things. Try to get advice from your business peers, your accountant, your bank, read the news online and keep checking the British Business Bank for updates – wherever you can to learn as much as you can. This information is changing every day too so by the time this is published there will likely be more up to date information out there. Don’t sit back and wait for the bank to come to you with a lifeline – you need to be as proactive as you can.
(Updated May 1st 2020) What’s the difference between Coronavirus Business Interruption Loan Scheme/CBILS and the Bounce Back Loan Scheme/BBL?
- CBILS (applications currently open)
- Specifics – this is the larger loan scheme for SME’s of up to £5 million, with up to a 6 year repayment term, no fees, no interest for 12 months and 6 month capital repayment holiday, and 80% guaranteed by the government. You may still have to have a personal guarantee if the loan is >£250k (this is bank dependent though).
- Interest rates on this may vary – I’ve heard a large range of interest rates out there (i.e. between 1% to 20% p.a.) so shop around if you can.
- Eligibility – you will need to prove that your business is a “viable” investment. This will mean different things for different lenders, but in general they will require that you were EBITDA positive (earnings before interest, depreciation, amortisation) prior to coronavirus taking hold.
- Businesses that were previously denied under the CBILS scheme by their bank should ask about the BBL scheme, as the viability requirements for this scheme have been somewhat relaxed.
- Bounce Back Loan Scheme (BBL) (applications open on 4 May)
- A smaller loan scheme for up to £50k, with up to a 6 year repayment term, no fees, no interest for 12 months and 12 month capital repayment holiday, 100% guaranteed by the government – and no personal guarantees.
- Eligibility – you will need to prove that your business would not have been classed as a “business in difficulty” on 31 December 2019 – (note that this may mean that EBITDA negative businesses who are in their early/growth stages could be eligible, however the scheme is very fresh so we’re not entirely sure on the specifics yet). There’s a bunch of detailed legal definitions that are specific to the UK online that define a “business in difficulty”, but the below is a copy/paste from HMRC:
[In general, HMRC will regard any company as being ‘in difficulty’ when it meets the criteria for insolvency under the Insolvency Act 1986, such as:
- the company is unable to pay its debts as they fall due
- the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (the “balance sheet test”).]
- The idea behind this scheme is to provide quicker access to funding for the smallest businesses – CBILS has been a ball-ache for everyone involved as the banks have been inundated with loan requests, and SME’s have often been turned away due to failing the traditional viability tests that banks are sticking with, so hopefully this new scheme will be the helping hand the hospo industry needs. Note you can’t get a CBILS and BBL – it’s one or the other.
Due to coronavirus I’ve had to close my doors – as a café owner/operator, what options do I have?
There are quite a few options to help you and your business get through this:
- Place any non-working staff on furlough (their wage is covered up to the lessor of 80% of their wage or £2,500 a month (both are pre-tax)
- Small business grant funding – either £10,000 or £25,000 grant from your local council, depending on what your rateable value or RV is
- Take out a long term loan either through:
- the Coronavirus Business Interruption Loan Scheme (CBILS) for up to £5 million, or
- If you are smaller business and in your first two years of trading then the British Business Bank Start Up Loan may be more appropriate – this can provide between £500 to £25,000 of loans at 6% per annum
- the Coronavirus Bounce Back Loan – aimed at SME for between a £2k to £50k loan – this loan we think will be easier to get for SME’s who are in the earlier stages of their life/who are non-EBITDA positive
- Request a rent holiday, or deferral in rent from your landlord
- Get in touch with the HMRC and request any corporation tax, VAT or PAYE payments be deferred through their Time to Pay service
- Get in touch with your suppliers and explain your circumstances – most will be in the same situation or at least understanding of your situation and be willing to help out where they can – just bear in mind that they may also be in the same situation as your business.
For the grant, how do you know your rateable value?
Your rateable value or RV will be shown on any rates invoice that you get sent from your local council. Some councils may have already reached out to your business stating the amount that you are eligible for, and others will ask that you submit an application online – be proactive and look on your local council's website for guidance as each council will administer this differently.
When and under what circumstances should you consider a loan? Should everyone do it?
Not everyone will need a loan – if you have sufficient cash in your business already to get you through the next few months without any sales then you can afford to wait – remember the CBILS scheme will be open for 6 months at least (i.e. until August 2020) so you can wait and see what happens.
If you think you will run out of cash over the next few months assuming the lockdown continues meaning no sales then start the discussions and start getting ready to apply for a loan. The interest on these will likely be very cheap.
I want to get a loan from the bank – what will they ask me to show them?
Every bank’s document requirements will be different, as will their lending appetite – generally though they won’t complain if you give them too much information instead of too little. Smaller businesses will likely also need to provide less information than larger ones, however, if you can prepare each of the below then it’ll be a great start. Also bear in mind that the money for CBILS won’t run out, so if you can afford another week of waiting it is better to get all of your ducks lined up and make one submission with everything that they may ask for, rather than submit only to find out you have been denied and need to submit another request with the extra information.
- Your signed financial accounts from the last 3 financial years
- The next 6+ months of sales forecasted under the following scenarios:
- Assuming coronavirus didn’t happen
- A realistic forecast of what your sales will be based on all of the information you know today. This could assume that the lockdown continues until end of May, then from June on things start to open back up and people begin to buy from you again – perhaps at 50% of what February’s sales were though, gradually increasing close to 100% of your sales by September.
- Proof that your sales dropped off due to coronavirus – i.e. weekly sales from the start of January until your last trading day.
- An estimate of what your absolute minimum costs are by month that you will have to pay e.g insurance, power, non-furloughed staff, website running costs, subscriptions to till systems or your accounting packages etc – focus on the bigger things in your profit and loss first and add in a buffer incase you’ve missed some of the smaller things.
- How much you think you will need as a loan to get through the period. This should take into consideration your reduced sales forecast, the current outstanding debt to all suppliers and the cost of keeping your business afloat for the next few months while the lockdown continues. You should also have a worse case scenario (i.e. assume lockdown continues for longer, or there is another outbreak) and work out how much cash you will need to survive that.
- A list of everything that you as the business owner have done to keep your business afloat (note that banks will require that you have done these so make sure you’ve looked into all of these before starting the application process) – e.g.
- that you have furloughed X% of your staff and reduced the hours of remaining staff to Y%
- requested a rent holiday or rent deferral until you can re-open
- negotiated with suppliers to delay payments
- utilised the governments “Time to Pay” deferral option on PAYE, VAT etc
- requested a grant from the local council based on your rateable value
- they may also ask what you as shareholders have put into the business to keep it afloat (this could be that you have reduced your wage to the living wage for the foreseeable future, pushed back shareholder loan due dates, paused shareholder loan interest payments and dividends for the year, converted shareholder loans to shares etc)
What will the bank require as security from me as the shareholder or Director?
If you borrow less than £250k, then they will not require a personal guarantee. If greater than £250k then they may require a PG, however this PG will be limited to 20% of the amount remaining on the loan (the remaining 80% is covered through the government guarantee). Note that they cannot ask for your primary residential property (PRP) as security under the CBILS. Some high street banks are also now starting to not require any PG’s on the loans (Lloyds, NatWest, RBS), so if you can try to shop around and see what other banks can offer you and get the best deal out there.
How do I do a 6 month forecast?
Bear in mind that the aim of this is to work out how much money you think you will need to stay afloat while the pandemic continues – this means that you should be realistic of the situation, or perhaps a bit pessimistic on how long it will take for business to get back to normal. It also means that you should look at the cash costs only – so ignore depreciation in this (and also ignore rates as these are no longer charged for 2020).
- Step 1 – get your last complete months profit and loss (P+L). If you don’t have this, then get your profit and loss from your accountant, then divide this by 12 to get the monthly costs.
- Step 2 – based on your last complete month, estimate what your sales will be for the next 6 months and show this by month. Write down the assumptions you use too so that the bank can understand why you have put each months sales as they are.
- Step 3 – COGS or cost of goods sold – this is a proportion of you sales – to calculate this look at your last months P+L and find the COGS % (COGS divided by sales). Then multiply each month sales by this COGS % - this will give you your COGS for the month.
- Step 4 – go through your P+L on a line by line basis and see what costs you can strip out – it may be easiest to split this into two segments to work out what the monthly total costs will be
- First segment is when we are in lock down for the next 2 months (for example). The costs in this will probably include your fixed costs that you can’t negotiate i.e. insurance, but exclude the variable costs i.e. staff costs
- Second segment being when the recovery begins, so perhaps your café is open but you have less staff than usual
- Step 5 – review it – does it look reasonable? Ask an accountant or someone who understands accounts to have a look and test it. Remember – don’t be too optimistic – you want the loan that you get from the bank to be enough for your business to survive, so be prepared for a slower recovery.
*We've created a forecast template in Excel for you to use. It can be downloaded here.
I don’t bank with any of the banks that are offering support through the CBILS scheme – what can I do?
At the moment it sounds like the banks are only tending to their existing customers – however once they get through these they will be able to look at new customers. This will take at least a few weeks, however I would guess that they would offer better interest rates and terms than banks that don’t offer CBILS. If you can, try to wait until the CBILS banks have some spare capacity and start looking into new customers – just keep on contacting them at least every week to see if they have any spare capacity, and keep checking their website for any updates. You could also look into the British Business Bank scheme for start-ups for businesses which have been operating for less than 2 years: https://www.startuploans.co.uk/what-is-a-start-up-loan/
Are private or bank loans something I should look into?
As a last resort you could look into these. They will likely charge a higher interest rate than those that offer the CBILS – you should probably first exhaust the CBILS and Start Up Loan scheme though as this will likely be the cheapest loan you will get.
What's happening with VAT? Do I need to pay? Is it fine not to? In general what's ok not to pay?
HMRC has announced that the following can be deferred if you get in touch with them. Note that this means you will still need to pay these by 31 March 2021:
- VAT payments
- Self-assessment tax bill
You still need to file your returns on time too and you will likely have to contact the HMRC for each month’s new tax related charge (i.e. monthly PAYE payments) to request that these can be deferred.
You will not be charged interest or penalties if you notify the HMRC within their timeframes too.
Rent - a lot of people have told me not to pay rent. In addition lots of landlords are not offering concessions -what's the advice?
Currently the government has said that there is 3 month forfeiture moratorium – in English this means that tenants cannot be evicted due to non-payment of rent until at least 30 June. After this date however landlords can continue evicting tenants for non-payment – this may change if the government brings in new legislation covering this.
What should you do then? Talk to your landlord, explain the situation and try to make a plan. Landlords don’t want empty sites so it’s in both party's best interest for the lease to continue. You might be able to negotiate a rent free period, deferral of rent until you are operating again, reduced rent, or they may claim your rent from your deposit on your lease.
What else can I do to prepare for the CBILS application process?
Be prepared as you can be – if you haven’t yet spoken to your bank then get in touch and ask them what they would like to see. Make sure you’ve also looked into/actioned every other relief option out there too i.e. rent holiday, VAT deferral etc. They’ll probably want to see your monthly accounts up until Feb ’20, so try get these from your accounting system/talk to your accountant about getting something together to show your financial year-to-date performance. If you’re starting the discussions with your bank then try to get your accountant or someone you trust who knows your business to dial in one the call.
What key qualifier or metric will banks look for when assessing if my business is a viable borrower?
EBITDA coverage ratio or serviceability will likely be what they’ll be looking at – this is your EBIDTA (earnings before interest, tax, depreciation and amortisation) divided by the debt (annual repayment amount of the loan + annual interest on the loan, + any other finance lease payments that you have to make). We’ve heard that the minimum that they’ll look to lend on at the moment is a ratio of 175%.
If you’re going to try calculate this then find the EBITDA coverage ratio from the annualised forecasted EBITDA from the current year and from the last two years. To calculate the debt, use the first financial year that has 12 months of repayments and 12 months of interest (i.e. ignore financial year we are in at the moment as this will include a 6 month repayment holiday and 12 months interest free). If the amount you’re hoping to borrow gives a ratio of greater than 175% then that’s one of the things that they’ll hopefully be able to tick off of their list.
Are there companies out there that can help sift through all of the providers and find the best one for our business?
There are – Funding Options (https://www.fundingoptions.com/) and Swoop Funding (https://swoopfunding.com/) are both worth checking out. The lenders that these guys have on board often have less strict lending requirements so they are both worth looking into.
They each offer a completely free, confidential platform for businesses to assess what funding options are available. How it works is you give them some company details which takes about 5 mins, then based on this they then give a bunch of funding options including loans and grants - and they can also provide access to equity funding. And in case you missed it, it’s 100% FREE - so definitely worth looking into.