Is your business quickly becoming a Covid-19 Dinosaur?

Although many commentators believe the economic challenges that UK businesses are likely to face over the second half of 2020 as a result of the coronavirus pandemic are yet to be fully understood, last Friday provided us with an initial reality check when it was reported that the UK economy shrank by 20.4% in April 2020. Even though many businesses received, and continue to receive, financial support from the government general opinion seems to be that the damage to the UK economy will be significant over the second half of 2020 and potentially beyond.

The Chancellor of the Exchequer has given businesses the flexibility to bring furloughed employees back to work part time from 1 July 2020, however, from 1 August 2020 employers will be required to pay the National Insurance and pension contributions of employees, and from 1 September 2020 and 1 October 2020 respectively employers will be required to increase their contributions to employee wages until government support for UK businesses is removed on 31 October 2020.

Some SME’s will be better placed to weather the projected economic storm and as the second half of 2020 approaches here are four key questions that SME’s with ambitions of growth should ask themselves:

1. Are there opportunities to grow within the market in which my company operates?

A well-run SME can be more adaptable and flexible than larger competitors. Strengths may include being a leaner operation, having a greater personal connection to customers and retaining better control of a more tailored product or service line, all of which may lead to a strong balance sheet that can be used to grow through acquisition.

Adaptability and a strong balance sheet means an SME could acquire a competitor within a shorter timeframe than larger organisations which could be appealing to the target company and lead to a stronger market position. Corporate Financier, Rajesh Sharma at Tilston Ventures, “Strong liquidity, good cash reserves, a balanced capital structure and income generating assets constitutes a strong balance sheet. This will help negate the need to raise external finance and help shorten the time of an acquisition process”.

2. How can my company attract funding in order to grow?

There are a variety of funding options available to SME’s. Traditionally, an SME would approach its bank in order to secure funding, however, banks usually require positive cashflow, realistic projections, secure assets and personal guarantees from owners of SME’s. Banking and finance expert, Alistair Howard at Glenville Walker Consulting, “If you have a good relationship with your bank, they should be the first port of call. Without such a relationship you will be starting from scratch in trying to convince them that you are a worthwhile credit risk. If you are unable to convince your bank you need to consider whether you should be borrowing at this moment in time. If your bank is unable to help or if you do not have a good relationship with them, it may prove beneficial in terms of time and stress to engage a good commercial broker to assist with your fundraising needs. There are many fund raisers out there, some specialise in commercial mortgages, others in cashflow or asset finance etc. so source the most appropriate to meet the needs and aspirations of the business. Lenders often want personal guarantees and although they should be avoided directors often give them in their desire to raise finance. Remember a personal guarantee could mean you end up paying personally.

For a small amount the government guaranteed Bounce Back Loan Scheme (BBLS) is a good place to start for SME’s”.

Crowdfunding has increased in popularity and although there are stories of businesses raising £100,000’s in a few days such funding requires SME owners to give away equity in the business in order to raise funds and publicising a good product or service in order to attract funding makes that idea susceptible to being copied.

A way of avoiding the publicity of a good product or service idea and attracting investment could be to offer further equity to existing shareholders with cash reserves. The investment made by crowdfunders or existing shareholders could benefit from tax relief should the SME and the investment qualify for such relief under the government’s Enterprise Investment Scheme or Seed Enterprise Investment Scheme. Corporate Associate Solicitor, Mark Williams at Glenville Walker and Partners, “Cash for equity can be an appealing proposition, however, it is important that an existing shareholders agreement is reviewed to ensure decision-making powers are not lost by virtue of a shareholder or shareholders increasing their own shareholding and it is advisable to instruct a solicitor to review the impact of any cash for equity investment.”

The Coronavirus Business Interruption Loan Scheme (CBILS) gives financial support to SME’s by offering loans and finance up to £5 million. The length of the loan depends on the finance applied for, however, the business needs to demonstrate it was not a “business in difficulty” on 31 December 2019. The government guarantees 80% of the finance to the lender and for the first 12 months will also pay interest and any fees on the finance.

3. Are there succession planning risks that SME’s are exposed to?

Reduced economic activity may mean employees are furloughed and/or potentially made redundant. Furloughing and redundancies lead to a loss of knowledge in the business which could be for a month or even permanently. The impact to SME’s can be debilitating and if such knowledge is not documented in internal processes there is a risk of knowledge gaps which could damage efficiency, productivity and financial performance.

4. What impact with the “new normal” have on SME’s?

Most SME’s will have adopted new working practices and invested money in order to make their working location safe for employees as a result of coronavirus. Travel restrictions mean more employees work from home and collaborate digitally. It is quite possible that regular home working becomes part of the new normal providing productivity and profitability are not negatively impacted.

Increased remote digital collaboration will require employees to adapt new working methods and it is likely that senior management will need to shift the working culture so that it is aligned with new working practices. More emphasis will need to be placed on trust, however, senior management and employees will need to realise results are more important than ever and senior management and employees alike will have to focus on the work that matters most in order to maintain and ideally improve market position.

For many SME’s the new normal has started to move from being a coronavirus story to a future of work story.

Glenville Walker and Partners are a specialist commercial advisory practice with a structure and network that enables it to work closely with corporate finance and general business advisory services and approach the challenges that businesses face holistically.

For more information, please contact a member of our Business Law team:

Denise WalkerHead of Business Lawdenise.walker@glenvillewalker.comDD: 0151 305 9652 | M: 07775 660 006

Mark WilliamsAssociate – Business Lawmark.williams@glenvillewalker.comDD: 0151 305 9656

Alex McGuckinSolicitor - Business Lawalex.mcguckin@glenvillewalker.comDD: 0151 305 9663