Whether you have been fortunate enough to receive a grant from the Government (albeit for furloughing your employees or through your Local Authority) many of you will still face the prospect of borrowing money. This article considers what options are available to you.
However, before doing anything I hope you have made a forecast (building in what you know so far from the Government’s proposals) including any savings you can make, and have begun to make an estimate of the amount of funding you may need. And frankly, given that no-one knows how this episode will play out, even if it looks as if you might just scrape by, I still recommend you make an application to line up some credit, just so that you know that it is available.
When looking at borrowing, what do you need to consider?
– Security – will the lender ask for security against the borrowing? This is only relevant at the time at which you fail to repay the debt. Obviously, we all want our businesses to succeed and none of us should entertain the prospect of borrowing money if we cannot knowingly repay it, but stuff happens – who knew about COVID-19 6 months ago? Security is different for Limited Companies than it is for sole traders and partnerships. A Limited Company can offer a debenture over its assets, such as the value of its stock, or its debtors or a piece of machinery. However, banks are often nervous of taking security from just the Limited Company and like to see the Director with some ’skin in the game’. In those instances, they will ask for a ‘directors guarantee’. These are normally for fixed amounts (equal to the value of the debt) but they expose the directors personal assets in the event that the company fails to fully repay the debt. Consequently, they should never be taken lightly. And in the instance the benefit of ‘limited liability’ does not exist, the lender can step outside of the company and look to the director who gave the guarantee. Sole traders and Partnerships have ‘unlimited liability’ (that’s why people incorporate and try not to give personal guarantees).
– Interest rates – these are important, but I do not believe they need to be ‘deal breakers’ when taken in the round. I would suggest that as a hierarchy of borrowing criteria it is better to achieve ‘unsecured’ (if you are a Limited Company) than it is to get the lowest possible interest rate. But each borrower is different and you must make your own mind up. If borrowing the money is the difference between survival and failure, and your cash flow demonstrates affordability, then the cost of borrowing is less significant. Of course, you must have reasonable confidence in your modelling. So, I wouldn’t be surprised if we saw rates as high as, say 12-14% on unsecured borrowings. It seems a shocking rate, but is it? Let’s face it, getting 6% would be awesome, so you are paying a premium of (say) 6% (if you secured 12%). Back of a fag packet …if you borrow £30k over 3 years, the the average amount borrowed is £15K. If you are paying 12% (6% premium) the additional cost, per month is £75pm – that’s not a deal breaker in my eyes.
– Early repayment penalties – if all goes swimmingly (who can remember what that felt like?) and you are able to repay the debt early, there may be a penalty, possibly equivalent to x months interest. Be aware of it, and consider your options – maybe you leave the debt outstanding and sweat the cash to do something really useful for the company?
– Term – the period taken to repay the debt? 3 years? 5 Years? Interest rates may vary, but more importantly, the monthly cost of repayment. This amount needs to sit comfortably in your cash flow.
– The credit process – applications for finance can impact credit scores. Ask the question and understand the implications, if any. But more importantly there is always the chance they will say no. That can have a very depressing effect, you do not want too many no’s. Understanding the likelihood of success at the start of the process is important.
So who is out there to provide loans?
There is currently one lender who is providing interest free debts, unsecured, with no credit process to facilitate short term cash flow finance. The Government. So if you are looking to postpone your VAT, PAYE, Income Tax, Corporation Tax etc. HMRC have indicated that there will be no interest payments (before the agreed date – eg VAT 31 March 2021, but there may be some after), no security requirement (for limited companies), no credit process (it’s automatic, possibly just one phone call to the COVID 19 hotline 0800 024 1222
After that, in no particular order;
– the High Street banks – under normal commercial terms, and currently painfully slow.
– the CBLIS scheme – but only once you have received a ’no’ from the ‘High Street’
– other specialist cash flow lenders – we have several contacts in this area and we are seeing a much faster turnaround than the High Street and very reasonable terms (given the climate)
1, Determine how much you need to borrow, and maybe add some.
2, Consider, in the light of the above, security, interest rates, the credit process and the term
Go out in all directions and (frankly) get as many offers as you can. From that choose the one that most suits your needs
Ask us for any assistance that you need in this process (all part of your normal fee at this time) we are here for you as much as we are able.
Landline – 01326 660022
Mobile/WhatsApp/Text – 07779799995 – Mike Hutchinson
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