Philip Hargreaves, GC Business Growth Hub’s Access to Finance Lead, shares a series of practical actions businesses can take to avoid defaulting on debt repayments and to sustainably manage your debt.
This page was updated on 22 February 2021.
Since the beginning of the pandemic, businesses across the UK have been able to access Government-backed loans to help relieve pressure on their finances and cash flow which have, in many cases, been severely impacted. With national restrictions having been re-introduced, we are seeing an increasing number of businesses build up debt, to keep cash flowing and to continue operating.
To support anyone that might be experiencing financial difficulties, we’ve produced this checklist outlining key actions you can take to effectively manage business debt during the coronavirus outbreak.
1. Understand your financial position
You should ensure you have accurate up-to-date information about your business’s income and expenditure. Producing information on a timely basis and reacting quickly to any changes required has never been more critical.
Specifically, it’s important to maintain a cash flow forecast, which should be updated on a weekly or monthly basis, to reflect:
- Trading income experience of the post COVID-19 period
- Actions undertaken to implement cost reductions, including:
- Staff costs (taking into account the impacts of the extended furlough scheme)
- Property costs
- Any further future actions necessary as a consequence of the above (sales, marketing etc.)
2. Consider and address priority debts first
Priority debts are those that, if left unpaid, could lead to your business having to cease operations or close. To decide which debts might be a priority for your business you should also consider the action that creditors could take against you in the event of non-payment.
Common priority debts include:
Commercial mortgageMost lenders will look sympathetically at businesses which have been impacted by the pandemic. Speak to your funder who may consider some of the following options:
- Reduced payments over an agreed period
- Capital and interest payment holiday over an agreed period
- Term extension to the loan – either to reduce monthly repayments or to make up for missed payments
Be open and honest about your circumstances and expect your funder to ask for detailed responses to questions relating to your business, current income levels and any plans you have to develop your business during 2021.
Business rentYou should continue to pay your rent if you are in a position to do so. Businesses that are unable to pay in full should communicate with their landlord and continue paying as much as they can. To support businesses to negotiate affordable rental agreements, the Government has published a Code of Practice for commercial property relationships during the COVID-19 pandemic which you can refer to. If you are struggling and cannot afford to make any payments, you will be protected from eviction until 31 March 2021. In addition, the Government has extended the restriction on landlords using Commercial Rents Arrears Recovery to enforce unpaid rent on commercial leases to the end of March.
Tax liabilities (corporation tax, VAT, income tax, national insurance contributions etc.)
The Government introduced several measures to help businesses manage tax during the pandemic:
- VAT deferral – if you deferred VAT due from 20 March to 30 June 2020 you can pay the full amount by the end of March 2021 or take advantage of the Government's VAT deferral ‘New Payment Scheme’ and spread the cost over eleven smaller interest-free payments during the 2021-22 financial year.
- Payment holidays for self-assessment tax – if you deferred your July 2020 Payment on Account and were unable to pay your tax bill in full by 31 January you will not be charged the 5% late payment penalty if you pay your tax or set up a payment plan by 1 April 2021 (Note: interest is charged from 1 February)
- VAT cut for the tourism and hospitality sectors
Businesses should also consider whether they might be eligible to claim R&D tax relief which can be backdated to the last two tax years and could provide a considerable cash injection to the business.
Business ratesBusinesses in the Hospitality, Leisure, Tourism and Retail sectors, as well as nurseries, will not be required to pay business rates for the 2020 to 2021 tax year.
PayrollUntil 30 April 2021 you can continue to use the Coronavirus Job Retention Scheme (CJRS) to cover part of your employees’ wages. However, businesses that are struggling may have to consider making redundancies at some point. Our guide can help you identify alternatives and understand how the process works.
Operational costs (utility bills including water, gas and electricity)
Business overdrafts and loansDespite the extension for new applications, it is now important that SMEs who have previously taken advantage of the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) review and update their financial forecasts. The second ‘lockdown’ has exacerbated existing trading difficulties and means that many original financial forecasts, submitted to lenders in support of applications, will need to be updated to manage impending repayment schedules and ensure communication with lenders.
You should review your supply chain to understand which suppliers are key to your business. If you rely significantly on a particular supplier and do not have an alternative one, you may have to consider them a priority creditor.
3. Work out which debts you will be in a position to pay and which may pose a problem
4. Where a potential debt problem is established, explore available debt solutions, which may include:
Speaking to your lenders and creditorsFinance experts stress the importance of managing creditor and lender communication and expectations, especially in circumstances where loan beneficiaries are looking for payment deferrals and/or extension deadlines. Do not avoid difficult conversations. The sooner you approach them, the faster solutions can be identified. The key to effective and early communication is preparation. Having a clear process for reviewing the cash flow forecast and ‘knowing your numbers’ at all times is crucial.
Review your loan repayment terms
Ensure you fully understand the repayment terms associated with any Government-backed loan schemes.
- CBILS loan terms remain largely unchanged as follows:
- Interest rates between 1.8% -7.4% APR , based on lender’s risk assessment
- No repayments due for the first 12 months
- The Government covers the first 12 months of interest payments
- The Government covers the upfront arrangement fee
- No early settlement fees
- No personal guarantee for loans up to £250,000
- The Government is also providing additional repayment flexibility by extending the length of loans from a maximum of six years to ten years
- BBLS loan terms:
- The Government will make a Business Interruption Payment (BIP) to cover the first 12 months of interest payments
- No repayments due for the first 12 months
- Interest rate is set at 2.5% per annum
- No personal guarantees and lenders cannot take recovery action over a debtor’s personal assets (such as their main home or personal vehicle)
Businesses may also be able to benefit from the Government’s new flexible repayment system, the Pay as you Grow scheme. Using the scheme could allow you to:
- Extend your loan from six to ten years
- Make interest-only payments for up to six months
- Suspend repayments completely for up to six months (you can only use this option once).
For non-COVID specific loans, you should speak with your lender to discuss more favourable repayment terms.
- Cease any non-business critical spend
- Consider reducing the amount of space you own/rent/lease (with many businesses having switched to remote working, and agile working potentially becoming the norm in a post COVID-19 world, you may require less physical space to operate)
- Negotiate more favourable terms of business with existing suppliers (are there any opportunities to arrange for order discounts etc.?)
- Consider changing suppliers who may require short payment terms
- Utilise the extended CJRS to support with employee salaries
- Reduce energy and fuel costs (Government research indicates that SMEs are missing out on savings of up to 25% on their energy bill just from implementing simple 'low or no cost' measures)
- Review eligibility and apply for the Business Support Grants available for businesses affected by coronavirus restrictions
- Redefine your marketing strategy and finetune your promotional activities to win new business. Refer to our Guide for marketing your business in a pandemic for a series of key considerations
- Review your pricing model. Our factsheet on target cost and market price model provides a useful approach to meeting customer price expectations, while also delivering sufficient profit to your company
- Improve your invoicing and collection processes
- Ensure you are receiving all applicable tax reliefs (refer to the tax liabilities section above)
Raise funds to pay off your debts
This could include:
- Seeking investment. Our Access to Finance expert advisors can help you navigate the complex funding landscape and gain introductions to appropriate
- Borrowing from family or friends
- Liquidating assets
5. If you cannot pay your debts
If you are unable to repay your debts on time or if your business’s assets cannot cover the debt incurred, some businesses may have to consider insolvency. Our insolvency guide addresses the Government changes to insolvency law and what steps to consider for your business.
According to Caroline Monk, Executive Partner at Beever and Struthers, the key message for businesses at this stage is to:
“not close your eyes, and to take advice. The mention of insolvency suggests a one-way street to the end of the business, but it does not need to be that way. There is far more focus now on restructuring and rebuilding… and early intervention, following early advice, will give you more options because you will be more in control of the process.”
The information provided is meant as a general guide only rather than advice or assurance.
6. Seek professional advice
Managing debt can be a complex process and you should seek professional help as early as possible.
If you are based in Greater Manchester or Lancashire, our Access to Finance team can guide you through the challenges presented by COVID-19, offering bespoke one-to-one support to develop business plans and financial forecasts. The team can also connect you to our Restructuring and Insolvency partners for guidance.
Philip Hargreaves, Access to Finance Lead
Philip has worked in commercial and corporate banking for the past 40 years. He is now responsible for the Hub’s Access to Finance Team.
Working closely with partners in the business and professional communities, Philip and his team are passionate about supporting local SMEs who are looking to grow.
“Fundraising in the current marketplace is often complex, requiring time and specialist understanding of all the available options. Putting the right finance in place, at the right time, can mean the difference between success and failure.”
The information provided is meant as a general guide only rather than advice or assurance. GC Business Growth Hub does not guarantee the accuracy or completeness of this information and professional guidance should be sought on all aspects of business planning and responses to the coronavirus. Use of this guide and toolkit are entirely at the risk of the user. Any hyperlinks from this document are to external resources not connected to the GC Business Growth Hub and The Growth Company is not responsible for the content within any hyperlinked site.