Mark Perrin, an advisory partner at accountancy firm, Menzies LLP, explains how businesses can improve their chances of securing a business interruption loan…
During times of financial crisis, businesses are always advised that the key to survival is to keep a close eye on cashflow. But what happens if everything possible has been done and the company needs to secure a business interruption loan to get by? What can business owners do to increase their chances of securing the money they urgently need?
Before completing an application form for a business interruption loan, business owners need to understand the true cash picture and how it might change in the future. This involves assessing how the coronavirus crisis could impact cashflow in three, 12, 24 and even 36 months’ time.
Even though it is not mandatory for financial forecasts to accompany applications to the Coronavirus Business Interruption Loan Scheme (CBILS), business owners should avoid committing to any loan without understanding how changes affecting the cash position of the organisation could affect their ability to make repayments in the years ahead.
As well as being a demonstration of management best practice, cashflow forecasts allow business owners to make well-informed decisions about how much money they need to borrow and whether the loan is affordable. Without this, they would be making decisions in the dark, without knowing whether their business is likely to survive or not.
Practising three-way forecasting is always preferable, as this is the most accurate and reliable forecasting technique.
The process involves using well-thought-out assumptions and preparing a monthly forecast profit & loss, cashflow and balance sheet, which integrate with each other, making the financial model more robust.
Once in place, the integrated forecast model enables ‘what if’ scenario planning, helping business owners to understand the implications of making changes to its financial assumptions. An independent challenge of these assumptions can also be extremely valuable.
Cashflow risks are inherent in some of the support measures that the Government has introduced to help businesses affected by the Covid-19 crisis. For example, deferring tax and VAT payments, taking repayment holidays on bank loans and extending supplier terms and conditions could all be storing up cashflow problems for the future, unless the forecasting process takes them into account.
In the case of the CBILS, loans have a term of six years and once the initial 12-month capital repayment holiday has passed, this leaves just 60 months in which to repay the loan from post-tax profits.
If the business takes longer to recover than expected, or margins remain challenged, it may not be possible to make repayments in the required timeframe. With the benefit of three-way forecasting, business owners will be better placed to conduct a sensitivity analysis and mitigate risks, before they become a problem.
Some business owners question why robust cashflow forecasts are needed if banks no longer require them to approve a loan under the CBILS. The simple answer is that they need to demonstrate that the business is well managed and that the loan is affordable. They also need to take into account that bankers’ time is limited, so loan applications need to be right first time.
Some tips to improve your chances of securing a loan under the CBILS follow:
• Check it and check again – it’s important to make sure your application is right first time. If there are errors or gaps in the information, your application may be rejected or significantly delayed. Ask a trusted adviser to check it for you.
• Fact find thoroughly – among the key tests for a loan under CBILS is demonstrating that the business was viable before the Covid 19 crisis. Detailed information about the financial performance of the business at this time should be compiled carefully.
• Demonstrate affordability – business owners and lenders need to be confident that the loan is affordable and repayments will be met. The best way to achieve this is to provide the bank with a well-considered, three-way forecast for at least the next two or three years.
• Reduce outgoings – lenders want to see that action has been taken to reduce outgoings, before applying for a loan. Evidence of rent or capital repayment holidays, staff furloughing and deferred tax or VAT arrangements should be provided as appropriate.
• Challenge assumptions – assumptions reached about how the business is likely to perform in the future may need to be challenged. For example, gross profit margins may never recover to where they were before the crisis, due to reduced demand and downward pressure on prices. Similarly, product ranges may need to be consolidated or work phased in order to minimise health risks and reduce the need for upfront expenditure.
• Focus on cash-generative activities – management best practice means considering what the business might look like post-pandemic. Staying focused on cash-generative activities, whilst explaining how the business needs to adapt, will inspire lender confidence.
• Practise positive communications – lenders may look favourably on applications from business owners who can demonstrate the benefits of staying in touch with customers and suppliers through the crisis. This enables the business owner to spot areas of sensitivity and minimise disruption when markets begin to recover.
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