Need to know: cash is king
Posted on 22/04/2020
By Michael Kianfar
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Cash is king, we all know that, and right now there is not much of it around. Businesses large or small will be pursuing every avenue that will either take away the need for cash or get some. I will cover in more detail below the types of cash injection that can be obtained but before that, I think we need to get the right mindset.
The right mindset
The pandemic is what economists call an Exogenous Shock, an event that was outside our sphere of control and one that has significant economic consequences. The key feature of an exogenous shock is that it comes out of the blue and it is unexpected.
Think of it as driving to the petrol station and finding its closed. You are surprised and annoyed and find it really inconvenient. You may end-up leaving the car at the station and walking five miles home. The important thing is that you will walk home, you will walk back to the petrol station when you know it’s open, you will fill up the car and you will go back to the same petrol station because this is the one that was most convenient to you.
What you don’t do, is trash your car and start walking or riding a bike. To get you to do that, you would need to have been subjected to regular cost increases, repeated instances of shortages, regular closures and social pressure of you being part of a small group that puts up with the nonsense.
This crisis will be over, and we will go back to our normal lives because our lifestyles developed over time and habits don’t change that quickly. So, at a time when you are nervous and worrying about the future, my suggestion is dig deep, hang in there and do whatever you have to do to survive the journey.
Business Support Loans ‘CBIL’
These loans were announced by the Chancellor in March with the intention is to give you confidence to carry on. Loans can be worrying to apply for, with many, understandably not wanting to be straddled with debt.
My recommendation is, don’t be worried and apply for the loans. You can always pay it back and it’s not going to cost you a dime if you get it and don’t use it. Get cash in the account because cash is king.
Applying for the loans
I suspect many of you have never applied for a business bank loan because you’ve known it’s pointless, you are not going to get it. This situation is slightly different because the loans are underwritten by the government (80%) and providing you supply the information correctly then you have a very good chance of getting a loan for up to £250,000.
Here are few steps that can put you on the right track for getting the loans:
- Collate all your business information such as your VAT number, UTR code, company registration number, number of staff, total turnover for 2019, total payroll for 2019 as well as registered address and trading address.
- Write a short paragraph about what you do
- Contact your accountant and ask them to prepare your application pack. THIS IS IMPORTANT. It will cost you a few hundred pounds but it’s worth it because they can provide the verified information that the banks need. Avoid doing this yourself because the chances are, you will slow down the whole process.
- Cash deployment – create a three-column table like below and fill in the boxes as accurately as you can.
- Management accounts – your accountant may not be able to support you with this because management accounts focus on pre-audit numbers and they also include a forecast of future earnings. Avoid over thinking this and simply insert the numbers for your expected sales and costs for 2020 to 2023 on your best estimate, excluding the COVID-19 impact. You can’t factor for what you don’t know, and the banks apply a stress test to your numbers anyway.
- Filed accounts – it is highly likely that you have abbreviated accounts and whilst useful, they don’t give a fair view of your trading performance. A trained accountant can develop your likely Profit & Loss account from two consecutive sets of abbreviated accounts but remember you want a quick decision from the banks, and you should make sure your accountant has access to all the trading information you have.
- Assets – some banks want a statement of assets. This is hard to do because there are many different ways by which assets can be valued and if you have not had a formal valuation of your assets you may have to explain your asset position to the bank. For example, you may own a café and you have a coffee machine. This machine might be on your books at £1,000 (purchased for £5000 about five years ago and now depreciated to present book value). You may have been selling 100 cups of coffee from this machine per day at a price of £2.50 per cup. Although the asset is booked into your balance sheet at £1,000, the ‘deprival value’ of this machine is £250 per day. Make sure the section of your document covering assets has a decent explanation of what you do and what those assets are used for.
- SALIE statements – most of you will feel offended and interrogated by this form. A SALIE statement is a schedule of personal costs, assets and income. Yes, it is very intrusive and unless you take no drawings from the business, you are going to have to do it. These loans are guaranteed by the taxpayer and whilst the vast majority of SME business owners are honourable people, there is the chance that some one feels it entirely appropriate to lay off staff, not pay rent and award themselves a nice bonus. The SALIE statement is designed to manage your drawings from the business.
- Put it all together – Make sure you avoid waffle in your documents and keep it simple. Once again, USE YOUR ACCOUNTANT.
Expected Rates for the LOANS
This is a tough one and I have to say that Government has confused a lot of people with their announcements. The first announcement was an 80% guaranteed loan at favourable rates and 10 days later it’s a normal loan on ‘Commercial Terms’ with a Government guarantee of 80%.
I think if you have a very strong trading business, decent data to back up your application and you're asking for £100K+, you may be offered 2.4% and I would not be surprised if people are getting offers of 9%.
If you do get a ridiculous offer, don’t get frustrated, simply press reset, go through the above steps and both apply to a different bank and re-submit to your existing bank.
It looks like these grants are being administered through the Local Authorities and it is based on the rateable values. The Government has already established the criteria and I won’t regurgitate that information here.
There is no doubt that these loans significantly disadvantage a growing business. Much like the Small Business Rate Relief scheme, where you do not qualify relief (mainly) if you have more than one operating location. As per normal, big firms get access to cheap funding, very small businesses get grants and big discounts and the ones that have sacrificed to build their business and are just starting to get there, get neither access to funding nor discounts.
My advice is to get your grant application in as soon as possible and if you do have more than one site, make the point that this is very unfair. If more people make themselves heard, then policy makers may finally take note.