Keeping the balance

 Feeling the bite of the COVID-19 virus

It is now the beginning of May and many small businesses are starting to feel the bite of the COVID-19 virus. The bills are still coming in, the doors (for the most part) are staying shut and staff are staying home or working shorter hours. In short your income has dropped and the overheads have not! The Government’s announcement of interest free loans sounds like a great idea, but is it?

Many businesses will be seriously considering applying for a government backed loan right now.

We have all seen the adverts and postings guiding us towards the Government website – and on 4th May (today) the Bounce Back Loans will be available. According to the website, the loans are backed by the government and offered through a list of accredited banks and lenders. The loans are interest free for the first 12 months, and you don’t have to make a payment for the first twelve months. After that first year, interest and payments will be pretty much as the banks are offering and on the same terms as most current loans. The only difference is the government is supplying the security – hopefully!

This might not be the right answer to your current funding problems.

The ‘Bounce Back Loan’ as with the ‘Coronavirus Business Interruption Loan’ may suit some businesses, but one size does not fit all, and this could mean that if your loan application is successful, you may have loaded yourself up with too much debt unnecessarily, or worse, taken out a loan which isn’t enough to serve its purpose and you can’t get other finance because this debt is already in place.

A one off loan now may cause you more problems further down the line.

Large ‘one off’ long term loans are usually taken out to start a business, invest in assets or projects and the repayment period would be set to match the life of the asset/investment it is funding. The reason they are not taken out regularly or easily is because of the payment loading later on, you don’t want the loan to outlive the asset, or the business.

If you have an otherwise profitable business that had to close its doors suddenly and expect to re-open just as before a month or two down the line, then this might be the answer for you, which is great! But think carefully, is this really the case and is this really the solution you are looking for?

Take a step back from your business and review it as a long term prospect.

Before entering into any loan or finance, you need to plan long term. Most businesses have a 5 year plan, which is an ideal based on past behaviour, and then concentrate on the next 12-24 months of realistic expectations. Of course, the last two months are unlike any most of us have seen before, however we have to look beyond this spring and summer to what we will be doing in the autumn through to next spring. We also have to look at what changes we will need to make with the business to carry on trading with new distancing rules and travel restrictions which may be in place for some time to come.

Are there other issues which will not be solved with finance?

Not all business problems can be solved with money, and cash in the bank won’t bring customers back to a shop or a pub without the right marketing. Many business owners are finding that their treatment of their staff now, is having a direct impact on their companies reputation and who knows what effect it will have on their future business!

Even the best companies who have kept good relations with their staff may lose them, many employees are likely to have been using this time to think about their future…!

Then there are other factors too, your products may need redesigning, your delivery methods might need to be updated and your premises changed to adhere to new rules.

Is the answer to change/consolidate other existing loans/debt?

Are there other forms of finance which would be better for you, such as short term overdrafts and invoice financing? Many businesses have traded quite happily for years, with owners funding them on a regular basis when required. This is fine when they have deep pockets, but how many of us can say that now?

If this is the case, the current situation is probably highlighting an issue which has been there for some time and a one off loan is NOT the right answer. Regular factoring to assist cashflow would serve much better, or simply a change to charging processes, to 25% up front and staged payments for invoicing is an example. One of my clients has adopted this and found it made a great difference to his balance sheet.

If your business already has loans in place, just adding another one is probably not the right answer, even if you were to get it. You would likely be better served to go back to your previous lenders, and consolidate your existing debt with them, and you might find that even without the government backed loans you would end up paying less long term.

Taking the Holistic Approach.

Many company owners look at debt as a separate problem to the rest of their business, often with distrust and sometimes with fear. However, if you can think of it as a tool, just like any other that you use, you can manage it, just like your software, hardware and production tools. You also have to look at the other assets at your disposal, your marketing and your customer/supplier relationships. Often a company can survive with very little cashflow, because of good supplier relationships. I have known suppliers to bring a company down, and to keep another going through tough times.

I hope I have given you some food for thought, before you sign on the dotted line for a loan. When asked ‘Can you afford it?’ I want you to be able to say yes, and know that to be true.