The COVID-19 pandemic is having an overwhelming effect on UK businesses of all sizes in most sectors. The Government's response has been swift but given the unprecedented impact of a country coming to a virtual standstill, it recognises that more needs to be done to support companies struggling to support themselves. While everyone gets to grips with these extraordinary circumstances, some key concerns have emerged, which we have addressed below.
It is important to note that the Government measures are being clarified and updated regularly, so the advice below is subject to change. We will endeavour to provide updates as new measures are implemented.
What options are open to small companies that may not wish to take on any further debt?
1 Grants
The following grants are available to certain small businesses:
- Small Business Grant Fund – for all businesses in receipt of Small Business Rates Relief or Rural Rates Relief – grant payments of £10,000.
- Retail, Hospitality and Leisure Grant – for all businesses in receipt of the Expanded Retail Discount with a rateable value of less than £51,000 – grant payments of £10,000 or £25,000 per property. All retail, hospitality and leisure businesses in England will also benefit from a 100% business rates holiday for the next 12 months.
Local authorities are in the process of contacting eligible businesses with details on how to apply for the grants (note that letters are being sent to registered business addresses and attending your business premises to collect the letter is permitted during the lockdown). The letter will contain details of the online application form where you can claim the grant – for this you will need your business rates account number, unique grant reference number in the letter, business bank details and an image of your business bank statement or cheque book.
Local authorities are aiming to make payment within two weeks of the applications being made. Further information can be found here.
2 Tax
- VAT – there will be an automatic offer to defer VAT payments during the period 30 March to 30 June, giving you until the end of the 2020/21 tax year to settle liabilities accumulated during the deferral period.
- Income/ self-assessment – payments on account due by 31 July 2020 will be automatically deferred until 31 January 2021
- For both of the above there will be no penalties or interest for late payments charged if you defer until 31 January 2021
We recommend you speak to your usual tax and accounting advisors for more information on managing cashflow and making the most of tax reliefs and deferrals that are available.
HMRC has also created a dedicated Covid-19 helpline for businesses and self-employed individuals which is open Monday-Friday, 8am-4pm: 0800 024 1222.
3 Negotiating with existing lenders
The first step is to speak to your existing bank. Provided your business has been historically sound and has a viable business plan going forward, and you can outline steps you are taking to mitigate the impact of the lockdown (see next), you may be able to negotiate flexibility into your lending arrangements, for example:
- a repayment holiday for a limited period;
- a temporary adjustment to financial covenants; or
- a deferral of the date on which financial covenants are to be tested
There may also be scope for making permanent amendments to financing arrangements, such as change in amortisation profile or the grant of additional security.
4 Furloughing staff
Consider designating "furloughed workers" within your organisation – those workers who will not be working and who would otherwise have been laid off.
Under the Coronavirus Job Retention Scheme the government will cover 80% of each furloughed employee's salary, up to a maximum of £2,500 a month, for an initial period of 3 months. The scheme will be accessible by employers through an HMRC portal, which is in the process of being set up and is anticipated to be live in the next month.
5 Rent holiday
If you are a commercial tenant, speak to your landlord to request a rent holiday or a switch to monthly rental payments. The government has instituted protective measures for commercial tenants unable to meet rental obligations by way of a temporary moratorium on forfeiture. More details and points for consideration are available here.
How can smaller limited companies access current government support?
For small companies open to extending their borrowing arrangements, the Coronavirus Business Interruption Loan Scheme (the "CBILS") is an option. The scheme has been well-documented in many previous articles, including here, and has been updated on Friday 3 April to ensure that money flows as quickly as possible to businesses in need.
In brief, lending is accessed directly from accredited lenders and borrowers are advised to approach their existing lenders first, before exploring alternatives if necessary. The CBILS supports lending up to £5 million by overdraft, invoice and asset finance and term loans, with lending periods of up to 6 years for term loans and asset finance and up to three years for revolving facilities and invoice finance. Full eligibility is determined by the lender in question, but quick eligibility criteria are as follows:
- the application is for business purposes;
- the applicant is a UK-based SME with annual turnover less than £45 million;
- 50% of the applicant's turnover is generated from trading activity;
- the facility will be used to support primarily trading in the UK;
- the borrower must operate in an eligible sector (details of the few sectors where there are restrictions are set out here);
- the lender must consider the borrowing proposal viable, were it not for the COVID-19 pandemic; and
- the lender must believe the financing will enable the borrower to trade out of the difficult period.
The Government (through the British Business Bank) will guarantee 80% of lenders' exposure under loans made under the CBILS (once business assets and any personal guarantees (if required) have been applied), the idea being that this will give lenders sufficient comfort to make quick credit decisions.
What options and protections are there for smaller businesses whose shareholders are conscious of incurring personal liability (for example, how to ensure your primary residence is protected)?
The requirement of some lenders for borrowing under the CBILS to be supported by a personal guarantee has been a point of contention in the early stages of the scheme. This has discouraged many businesses from proceeding with an application, leading to an announcement from the Chancellor on Friday 3 April that personal guarantees are not to be requested for lending up to £250,000. For loans over £250,000, personal guarantees may be required at the bank's discretion but are limited to 20% of any outstanding amount after any recovery from other security over the business' assets.
It is also worth flagging that primary residential property cannot be taken as security under the CBILS.
Notwithstanding the above, smaller business should be conscious of security they have already given to lenders in respect of their existing facilities, which may include personal guarantees.
Directors of businesses should also continue to be conscious of their overarching directors' duties (with risks of personal liability arising in certain circumstances), and we recommend now more than ever that good records are made of decisions being taken – please see our update here in response to last weekend's announcements about proposals to relax insolvency rules.
Given the long lag time (3 months) before government support for the self-employed is due to arrive, how should the self-employed with reduced income think about managing their financial planning?
Where it is legal to do so under current lockdown restrictions, the self-employed are still permitted to continue trading whilst claiming the self-employed support allowance (unlike furloughed workers who are not permitted to work for their employer whilst on furlough leave).
The self-employed should also take advantage of tax reliefs/ delays and grants as noted above, as well as personal finance options such as the 3 month mortgage repayment holidays being offered by banks.
We recommend you speak to your usual tax and accounting advisors for more information on managing cashflow, tax reliefs, and personal finance options. The fallback for some will be Universal Credit (which has also been updated in light of COVID-19).
About the Authors
Contributors include Joanna Hossack, a member of Foot Anstey’s Banking and Finance Team and Charlotte Hugo, a member of Foot Anstey’s Corporate and Private Equity team, both have long experience of helping business clients navigate finance and find the best options for their needs.
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