With the shock and emotion of this crisis behind us we’ve been talking to a lot of business owners about cash and in particular how to fill gaps in cash flow.
Most business owners are taking advantage of the various measures and schemes put in place to support them. But what’s next ?
For most a dip in liquidity will need to be funded by a cash injection. Whilst a small number of businesses may be eligible for a quasi equity loan the majority will turn to the governments’ flagship scheme CBILS (Coronavirus Business Interruption Loan Scheme).
For a recap on the scheme please read our guide and initial thoughts, here.
Here’s the problem though…
On the 15 April The Guardian reported that 6,020 loans had been issued under CBILS worth £1.1bn. A week later according to UK Finance a further 9,000 applications had been approved worth a another £1.45bn. Whilst this is great news for those accessing funding there were according to the Guardian (at 15 April) more than 300,000 informal inquiries, seeking out more information. This isn’t a surprise either since most business owners are currently working their way through cash flow models to identify how much funding might be needed to survive. The majority of applications will be made in the weeks ahead.
At least 8/10 business owners that I am speaking to are reporting a significant “cash drain” that will need plugging with cash through CBILS.
The problem is obvious. Whilst the banks are doing a great job in dealing with applications as CBI economist Rain Newton-Smith said “…while the pace is picking up, many firms are still missing out. More loans must get out the door faster for the businesses facing distress, especially smaller businesses.”
We need to find a faster way for small businesses to access cash
It was therefore great to hear the announcement by the British Business Bank on 17 April that Funding Circle had been accredited under CBILS. As Funding Circle put it themselves on their website they are “Revolutionising a broken system”. They do this by deploying technology into the lending process meaning that they can process applications quickly through their platform. Maybe this kind of approach was what Rain Newton-Smith meant when he said …
“Finding quicker and simpler routes for smaller firms to access cash, and extending repayment schedules to encourage more businesses to take them up are two ways that could make a difference.”
I was therefore surprised to hear local Relationship Managers caution small businesses about Funding Circle at a recent event. Whilst I appreciate that Funding Circle’s debt collection process could be described as “proactive” clients with Funding Circle loans that have needed to reschedule debt have always been able to.
That aside though if CBILS is to be successful banks need to accept that they need some help processing applications from smaller businesses and that through Funding Circle there is a way to achieve this leaving them available to deal with more complex funding requests.
Top tips if you are thinking about funding through CBILS
It might be obvious, but we think that well thought through and structured applications will be seen in a more positive light by the bank/ lender than general conversations around support.
Lenders will assess applications in the same way they always have (because they will use the same process, systems and people) and therefore management accounts, a business plan and forecasts will be essential parts of the application. You might also keep an analysis of creditors, debtors and time to pay arrangements with HM Revenue & Customs (HMRC).
If you are making a Funding Circle application you will also need copy bank statements for the last six months as detailed below:-
Impact of the Coronavirus Crisis
In your narrative you should be ready to outline the impact the coronavirus crisis has had on your business dealing with facts and figures within the narrative. It will be vital to ensure the lender understands the impact on the business the crisis has had.
Structure your argument
In your business plan, you should focus on the strength of the business before the crisis, its trading performance and ability to generate cash.
You should also outline the path back to this position making clear the steps you are taking and the time frames you are working to.
From early discussions with local Relationship Managers across the four main high street banks each lender is adopting a slightly different interpretation of what constitutes “viable” and whilst I have sympathy, given the constant changing CJRS guidance, it’s not helpful when you are trying to write an application for funding. Your narrative here needs to focus on the success you had prior to the crisis and why you were viable and sustainable before.
In their appraisal of the business plan, lenders will want to understand management capability and whether there are any long-term implications of the economic fallout on the business or industry it operates in.
Go for the maximum amount of funding
CBILS is not very flexible in how you draw down cash. We’ve run a few cash flow models that show two peaks where funding is required. Ideally the scheme would offer an overdraft now to cover the short term variability in cash and then a medium to long term loan covering off (1) the debt pile built up over lock down, (2) the costs of re-opening and (3) the losses that may be encountered as sales are developed after fully re-opening.
It doesn’t allow for this flexibility though so you need to make one application that covers both and then repay what you don’t use. Not ideal but with interest payments being covered by the Government for twelve months and no early repayment penalties the scheme is flexible enough for you to do this.
The CIBLS is going to be an important measure for any business looking to plot a course to safety out of the current crisis. Key to a good application will be the narrative and cash flow forecasts. If you have any doubts over these or would like our assistance in generating them please contact funding specialist Stephanie Smith or Director Richard Hallsworth on 01522 815100.