Preparing your lockdown recovery strategy; Finance options worth considering

Author
Ruth Bethel
Access to Finance Specialist
28th January 2021

This year, South West businesses will need to consider how they bounce back from treading water to restoring their pre-COVID operations, bringing back furloughed staff and hopefully meeting increased demand. As businesses plan to forge ahead, some financial challenges will need to be considered and overcome. 

It’s a transition that will require delicate handling. Once the economy starts to recover, there will be increased demands that may place businesses under considerable financial pressures, especially with regards to cashflow.

Spending (cashflow out) almost always precedes payments (cashflow in). So as a rule, a business has to spend – on staff wages, raw materials, stock, parts, premises, equipment; overheads, including finance repayments – before they can even start to produce the goods and services that they get paid for.

This is where unprepared businesses will struggle. As the economy recovers and the demand for goods/services increases, unprepared businesses that have no cash reserves will quickly find that they are unable to finance their operations, with catastrophic consequences.

So, planning, forecasting and identifying potential outcomes will be critical to business survival. SME owners should plan for at least three outcomes: 

  • optimistic
  • pessimistic 
  • midway realistic scenario

Note that quite often, the most optimistic outcome will require the greatest cash commitment at the outset.

Once the planning and forecasting is done, put it into action. By this stage you should know how much cash you will need to support the running of your business and meet its cashflow demands.

If you haven’t got this amount of reserves, or don’t have arrangements where you can access additional money quickly, then you’ll need to identify some alternative strategies. 

Here are some of the options you might be considering:    

Flexible funding options

 

 1. A simple bank overdraft. This is the most flexible option of all, providing an agreed level to which you can spend from your business bank account. As the balance of your account will change from day to day, you only pay interest on the amount you owe on a daily basis.

The drawbacks? Banks can be reluctant to agree overdrafts, and once approved, it is easy to become reliant on them and never get back in the “black” i.e. in credit. 

If you’re continuously reliant on your overdraft, consider asking your bank if it will convert the overdraft to a loan so you can repay it, potentially reduce interest charges and get rid of the debt.

 

 2. Credit/debit cards. These can provide businesses with additional finance in two ways. Firstly, credit cards are useful for short term cashflow – ideally when you’re certain you will only need the advance for a very short time as this is an expensive way of borrowing.  

Secondly, if you have a lot of customers who pay by card, then Merchant Cash Advances (MCAs) or e-commerce finance facilities, which are linked to your card terminal sales, can provide a cash cushion. A relatively new funding option, Merchant Cash Advance is an innovative idea particularly aimed at retail, leisure and hospitality businesses. 

 

 3. CBILS. If you’ve taken out a Bounce Back Loan (BBL) and it’s proving to be insufficient, then up until 31st March 2021, you can top it up to the maximum you can borrow – or apply for a Coronavirus Business Interruption Loan Scheme.    

Top tip: if you have an existing BBL or CBILs and you refinance it, the 12 months interest free period and capital repayment holiday will start over again. So you buy your business another 12 months free of repayments – hopefully time to get back on track when we emerge from lockdown. 

Cautionary note: criteria apply when you apply for loans. When applying for CBILs, you must be prepared to provide a potential lender with your latest three years’ financial statements (accounts). Or if you have been trading for less than three years, your latest accounts, plus up to date management information.

 

 4. Invoice Finance. If you are selling to other businesses, whether goods or services, an invoice finance option offers cash against your issued invoices before your customers pay. You can therefore continue (or start) to offer your customers credit terms.

Worth noting: make sure the costs of the facility are included in your sales prices. It’s very unlikely that your customers will notice an additional 1-2% increase in prices – remember you are giving them credit.

 

 5. Trade Finance. If you trade in physical finished goods and secure large orders from well-established businesses, but don’t have the available funds to buy goods from your suppliers, Trade Finance can bridge the gap.  

The financier purchases the goods, then, after delivery, discounts the customer invoice to repay the trade advance. You get the remainder of the sale price which should cover your overheads and profit.

 

 6. Asset Finance. As you emerge from lockdown, will you need to invest in additional equipment, IT, vehicles or P&M? Asset Finance enables you to make a sustainable investment in capital items without using up working capital.

There are two basic options; one is Hire Purchase – where you pay for the item(s) over a period of months then they become yours. The other option is leasing, where, again, you pay the cost of the item(s) over years, then continue leasing them at a small cost – known as a “peppercorn rent”.  

The two options have different tax treatments, and your accountant should be able to advise you which is more advantageous for your business.

 

To further explore and understand finance solutions that will enable you to transition successfully, visit our Finance Hub. From there you can directly access finance providers.

 

If you would like to speak to one of our finance experts who can provide fully funded phone support, enter your details here and we’ll give you a call back. 

 

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