How to manage Covid-19 business debt

UK businesses borrowed five times more from banks between January and August 2020 than in the whole of 2019 (according to EY Item Club¹ – a leading UK economic forecasting group). Over that eight-month period, new borrowings (net of repayments) totalled £43.8bn, compared to the £8.8bn of 2019.

And it is small businesses who have increased their debt levels the most. Stephen Palmer of Cranwell Wealth Solutions, a financial advising practice based locally in Heathfield comments: “This isn’t overly surprising given that SMEs rely so heavily on cash flow. Small changes in business output can rapidly create cash issues and many don’t have the luxury of cash reserves behind them.”

Here Stephen Palmer and his team of financial advisers at Cranwell Wealth Solutions review the psychological challenges for those who have taken on debt and then offer practical advice from various experts in the field.

For some business owners taking on debt can be a time of enormous stress. For others they simply see it as an enabler for survival and growth. Either way, debt can be looked at quite simply as a business tool that should be used appropriately, either to survive or grow, says Stephen.

For those that are finding the debt particularly stressful, the best course of action is to rigorously plan for how you will manage the debt and its repayments. Knowing exactly what actions you need to take and what scenarios you have planned and prepared for makes the whole situation much more manageable and less stressful.

Another tip for stressed-out business owners is provided by Rob Warlow, founder of SME loan broker Business Loan Services. He says that one of the things entrepreneurs and business owners are often not so good at is putting their hand up and saying they need help. “It’s just not in their DNA,” says Rob, “but probably the top tip is to take some outside advice. Good advisers will act as a sounding board, will bring ideas to the table you may not have thought of and will be supportive from an emotional point of view.”

Miguel Calabrese, managing director of Blue Rocket Accounting, gets into the nitty-gritty point about rigorous planning. He suggests doing detailed cash flow projections for a 13-week period (90 days).

He says: “We like 13 weeks as a timeframe because if you do spot a cash crunch, there is enough time for you to do something which will have an impact on the cash position at the end of this period such as finding more funding or cutting costs. And it is a short enough timeframe to make the cash flow projections fairly easy and accurate.”

Miguel recommends making this a ‘rolling’ forecast. At the end of week one, add week 14 to the forecast and update the intermediate weeks’ forecasts. Cash flow planning then becomes a weekly exercise for business owners who quickly build up a very detailed knowledge of their short-term cash position and get more and more comfortable because there is less uncertainty.

His suggestion for starting the forecast is to begin with outgoings. These should be fairly predictable for the next 13 weeks. Revenues are likely to be less certain, so Miguel suggests – “Look at a best-case scenario, where the COVID-19 recovery really takes off and how you might capitalise on that. Then look at a worst-case scenario,where revenues are badly affected and make sure you have a contingency plan so that that cash crunch can be survived.”

His other top tip is around credit control. Miguel says: “Many people went a little bit soft on their credit terms in the first lockdown which is understandable but that can’t go on. Put a proper credit control system in place and make it consistent. People tend to be scared off by having to chase for money but don’t be, – if payments are due to you, chase them up. That’s just normal business.”

Managing payment terms is also a point stressed by Rob Warlow. He says: “Are you maximising your creditor terms – if someone is giving you 45 days are you taking it? In this case there’s no need to pay in 15 days. Yes, you need to keep good relationships with suppliers, but you have to look after number one and, as long as you don’t go over your payment deadline, there’s nothing wrong with that.”

A last tip from Rob is about communication. He says: “Keep your suppliers and lenders in the loop if there is a problem on the horizon. If you see a cash crunch coming sometimes the natural reaction is to keep it quiet. But you actually get much more credibility and deepen your relationship with suppliers and lenders by engaging early in the event of a problem.”

Stephen Palmer concludes: “Help is out there, make sure you get the right advice from experts in their field and don’t take it all on your own shoulders. Sometimes a fresh pair of eyes and a different perspective is all you need to find great solutions for planning the repayment of business debt. We wish you and your business far more settled and certain times in the year ahead.”

The opinions expressed by third parties are their own and not necessarily shared by St. James’s Place Wealth Management.

^{1, 2} EY ITEM Club Outlook for financial services, Autumn 2020