Whilst most of the recent changes to the CBILS are on the whole welcome and will make facilities easier to access for many SMEs, I am still concerned that the Government is encouraging, in fact expecting, SME business owners to load their business with debt.
As much as the commitment from the Treasury to cover the first 12 months interest and fees is appreciated, and even some lenders are offering capital repayment holidays for six or twelve months, businesses will still have a huge revenue decline and lack of profitability over this period, and leveraging a company now will only put more strain on their cashflow into next year. Any recovery later this year will have to be used to service this debt later and will extend the pressure on businesses for longer.
Kirsty McGregor, Chairman of The Corporate Finance Network explained: “I think we have to be realistic and understand that, as we have always had a large percentage of businesses who have been trading without any liquidity or reserves during the ‘good times’, we cannot expect that those businesses will be able to trade through this difficult time. Bringing more debt into their business is just not sustainable.
“There are also a significant percentage of business owners who were already past retirement age, and they may decide that this episode is causing them too much stress, and it is now time for them to exit.
“And lastly, there are business owners who enjoy running their company, but don’t earn a great deal from it due to low profitability, and they may decide that the responsibility is not worth the income they gain from it, especially if they do employ some staff, and they may choose to close down their business.
“This could affect many independent businesses on our high street, in spite of them being offered some of the greatest support with the grants previously announced.
“For these reasons, we need to allow business owners who wish to wind up their business, to do so in a structured and simple way, but whilst ensuring we protect the jobs of any staff they were employing.
“Our proposals consider all situations, whether a business owner wishes to exit, or if they would like to trade on and come through this crisis”
The Corporate Finance Network has other suggested solutions, which assist business owners who now want to exit their business in a structured way, whilst protecting their employees, and for those who do think they can trade out of this crisis.
- Rescue and Recovery: a struggling business (the vendor) is sold completely to a stronger business (purchaser). The purchaser is provided with a grant at completion to fund the staff and overheads for a period of time, then corporation tax and capital gains tax incentives across the longer term. The vendor agrees to accept no value for goodwill and only deferred consideration, linked to an earnout on success. This removes the majority of risk for the purchaser and allows a vendor to leave the business without any consequences of liquidation. Lenders will be asked to support the transition of ownership
- Lifeboat Scheme – owners of a struggling business can liquidate or dissolve their business in the usual way, but without any of the usual potential consequences of liquidation for directors, as long as they ensure their staff are redeployed before they commence the insolvency process
- Flotation Aids – for those businesses who believe they can trade out of this crisis.
- Either grants for smaller amounts (under £100k) to support the business continuing to exist, by providing additional funds to cover essential overheads and wages;
- Or a larger loan under the previously-announced CBILS scheme, as amended from 6th April 2020
Details of these alternative suggestions were passed to the Treasury in an email by Jason McCartney MP on 2nd April 2020 and copied to the cross-party BEIS Committee.
McGregor concludes “The emphasis should always be on saving jobs, so if business owners don’t want to continue to trade, they should be able to exit, whilst looking after the employees at all times. And the other smaller businesses who do wish to continue in business, should be supported, without the need to take on the stress of more debt.
“I hope the Chancellor and his team will consider what further support can be offered, and make some swift announcements, before many more business owners take matters into their own hands and make decisions which are irreversibly and potential catastrophic for the UK Economy.”