Managing Covid-19 debt

Businesses have borrowed heavily during the pandemic. Owner-managers face a whole new set of psychological and practical challenges

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

Small businesses have increased their debt levels the most. While EY forecasts the total stock of business loans from banks (which includes outstanding balances of loans taken out in prior years) to be up 11% in 2020 (compared to 2% growth in 2019), it reports the jump in SME lending stock at around 20%2.

Sanjay Bowry, one of our business growth advisors, says this isn’t surprising: “SMEs don’t typically operate with large cash buffers and even a small drop in business activity can create a cash crunch very quickly. So, with the large and sudden impact of the pandemic, they have quite rightly been taking up the debt support that has become available – mostly from the government-backed Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS)”.

But, says Sanjay, this is presenting owner-managers with new challenges, both psychological and practical.

Psychological challenges

Sanjay says that for many business owners, taking on debt is anathema: “They have financed their businesses successfully from day one without debt and never even considered borrowing money. For business owners with this mindset who have now taken on debt, it can be a time of enormous stress. Others have a diametrically opposite view. Debt isn’t seen as a negative but as an enabler for survival and growth.”

What Sanjay stresses to clients though is that debt isn’t a good or a bad thing, it is simply a business tool that should be used appropriately – be that to survive or to grow. His advice to business owners who have reluctantly taken on debt during this crisis, and whose natural disposition is to worry about it, is that the most effective stress reliever is to plan rigorously for how you will manage that debt and its repayments. He says: “Just 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 from me 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.”

Practical tips

Miguel Calabrese, managing director of Blue Rocket Accounting, gets into the nitty-gritty of Sanjay’s 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 looking at scenarios. Look at a best-case scenario, where the Covid 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. Remember they will also be wanting to know where their cash flow position stands. The last thing they want is a call from the blue saying I can’t pay you this month. Their reaction will probably be ‘why didn’t you tell me earlier?’.”

Contact Sanjay Bowry if you’d like to discuss anything in this article.

This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.


1 EY

2 EY ITEM Club Outlook for financial services, Autumn 2020