After the recent bailout measures were announced by the government, business leaders, the press, various groups, were very quick to hail the packages on offer as ‘game changing’ or will ‘keep all businesses afloat’. At the time I didn’t see it that way, nor have I changed my opinion. Information and detail was lacking and of course there was no timescale of money hitting accounts. Now the dust has settled, we can see what these packages mean and how people may benefit from them.
(This is not an attack on the government or their rescue bid, it is however an honest opinion on some of what is on offer and what this means to small businesses.)
1. The £330bn package are government backed loans (up to 80%). It might have seemed like a colossal amount of money, and it is, but this is a facility not a promise or default acceptance. Banks have the discretion to decide who makes a viable debter and decides an appropriate offer based on the risk. We’ve seen some loans offered at more than 20% APR. Clearly repaying these loans at some point in the future will be a huge weight that will not be felt until this crisis subsides. Assuming a company manages to get through it, they will still have to figure out how to rebuild turnover, re-engage staff, prioritise general saving and reducing costs but then also consider meeting the obligations of the loan.
2. Furlough: A hitherto relatively unknown term allows companies (with the permission of employees) to effectively stand them down and lay-off, in the true sense of the word – not ‘fire’, until such time as the business can support paying them a full time wage. With the government guaranteeing 80% of wages up to £2,500 per month, companies can decide if they want to top them up or leave them as they are. Currently, it is a rolling three week process that businesses need to apply for.
3. Self-employed package: Unlike Furloughing, self-employed workers can seek the same 80% wage (plus any voluntary top ups) up to £2,500 and still keep working. Crucially it is calculated on three years of returns and dependent on the most recent filings. Where a worker hasn’t made a submission, they may have additional methods of providing information and are advised to speak to HMRC - if they can get through. This scheme is limited up to £50k ‘profit’ that the self-employed company made. Any earnings over this will deny participation in this scheme.
4. Sole Directors: Much debated on forums and groups, the hundreds of thousands of limited companies with sole directors who pay minimum ‘salary’ or around £700 a month, who then top up their income by receiving dividends from profits. The advantage is not having to make compulsory NI contributions as employee or employer, nor paying tax at source or PAYE (pay as you earn). The downside being that if there are no profits in the business then inevitably the threshold for NI is breached and payroll must commence. There is of course tax to be paid on earnings at the end of the year and so too is there corporation tax on the profits. Some argue that the company pay the tax on the profit and therefore the individual only need concern themselves with a reduced rate of personal income tax. There are two sides to this story but the reality is many in this situation are not entitled to any bailout or scheme UNLESS they have been PAYE – which most, if not all, wouldn’t have.
5. Universal credit: I won’t go into great detail on this but I can share that over a million applications have been made for UC (universal credit) since the government announced it was removing the floor limits. Not only is it taking time to process each claim (some have shared they are literally tens of thousands of people ahead of them in a virtual queue), but the time to receive payments is unknown. It could be a number of weeks before the beneficiary receives anything at all.
6. The VAT payment delay is in my view a red herring – companies do not pay VAT, they collect it on behalf of the government. It is far better to place any VAT monies received into a separate account and forget about it until it needs paying. Those spending VAT income are only ensuring they are building up a debt to pay later.
Here lies the monumental problem. Loans are pushing a problem of poorly financed or low-cashflow businesses into a future of enormous debt. The only benefit are that monies are available relatively quickly. Anybody receiving a grant (rate related not mentioned above) or direct support for furloughing workers aren’t expecting to receive money for at least another few weeks. At worst, around June. By then the economy will be limp and barely functioning, if at all. Businesses will be closing at a rate of knots, loans being defaulted on left right and centre and the general outlook very bleak indeed. The impact on people’s livelihoods and health, notwithstanding the virus itself, will be astronomical.
One thing is for certain. Businesses cannot sit and wait for this to happen. They have to take action to try and weather the storm or, as the case may be, decide whether battling to keep the business afloat is a good idea or not. There is no shame is closing a business in bad or good times. Sometimes it is better to admit the damage is irrecoverable and concentrate on personal financing or responsibilities. Lose the battle but win the war.
TALK TO YOUR LANDLORDS – DON’T SIMPLY DEFAULT
You will have contractual obligations to pay your rent and bills and depending on any personal guarantee status, you may be personally liable if your business fails to honour them. It is the landlords right to follow the contract by the letter, but unless you communicate, you will never know what is possible. This morning I learnt of a company that has got a rent-free period until ‘trade is back to normal’. They got this by being polite and level-headed when speaking with their landlord. Clearly not all will be so amenable, but most will want to reach and agreement and therefore you should try and find one.
HAND BACK ASSETS & STOP SPENDING
Are you able to hand machinery, cars, vans or other assets back to a hire purchase company? Have you checked your credit agreements to see what can be postponed or a holiday clause enacted? Do you have assets that you haven’t used or no longer need and therefore could sell off? You’ve got to look at costs. Not every company is able to go online or continue a full production line with social distancing measures so what else can be done to reduce the financial burden? What software or licensing packages can be moth balled? What about google or other pay per services? If you need to and are able, stop the lot. Restart it when you can afford to.
This situation is going to get worse before we see any glimmer of positive change. As a business, you’ve got to think clearly and rationally about the steps you are taking. Where you are not able to get government help, seek the help and support of others. There are lots of forums and resources online where people are only too happy to share and give advice. Be careful to satisfy yourself with any action before commencement but you have to do that – take action.
For more information or help, please contact us. We are taking on a number of pro-bono or peppercorn projects so get in touch if you need help.