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Preparing now for the end of the furlough

Furlough payments are ending in October and businesses that have used the various support schemes to stay afloat through the coronavirus crisis will now have to consider future planning without state-funded grants, loans and other measures.

31st Jul 2020
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The government’s decision to change, and ultimately close, the schemes is to protect public finances, but also to encourage employers to re-employ staff and start actively seeking ways to boost revenue. Bosses will get a £1,000 bonus from the government for bringing a furloughed worker back to work, Chancellor Rishi Sunak has announced, in part to stop the fear that the end of the scheme merely means the start of a wave of layoffs.

Cashflow forecasting during any time of uncertainty is difficult, but there are extra burdens on firms as the UK emerges from lockdown with industry and society so drastically altered by Covid-19.

Trade cannot be expected to return to pre-lockdown levels given the ongoing social distancing regulations still in place, and the fear in the mind of the public over a further surge in cases.

The economic slump stemming from the lockdown has erased any thoughts of a speedy recovery, and has drawn comparisons with the 2008 financial crisis.

“This time around, should the economy remain weak, the challenge will be to recapitalise much larger swathes of it,” said Giles Wilkes, senior fellow at the Institute for Government think tank. “If recent months have taught us anything it is that worst-case scenarios should be prepared for. The time to start doing so is now.” 

Payback is coming 

It is estimated that the state spent £35bn covering the salaries of furloughed staff from mid-April until the end of July. By the time the scheme ends, the figure is expected to reach £70bn; roughly £10bn for each month the scheme was active.

From August, national insurance and pension contributions for furloughed staff will have to be paid by their employers again.

From September, while employees on furlough will continue to get 80% of their salary, the proportion that the state pays will be reduced each month – the government will only pay 70% in September and 60% in October, with the employer having to make up the difference.

The scheme will end on 31 October 2020.

Furlough aside, British businesses borrowed nearly £35bn under three emergency funding initiatives, with demand strongest for a 100% state-backed scheme for the smallest firms.

The Coronavirus Business Interruption Loan Scheme, launched in March, carries an 80% government guarantee for loans of up to £5m. The Bounce Back Loan Scheme (BBLS), which gives loans of up to £50,000, was launched in May after signs that other lending schemes were making slow progress.

While the government gives 100% security to the banks for loans taken out under the BBLS, it is the responsibility of the business to pay back the loan once monthly repayments begin following the initial 12-month grace period. 

Banks have approved about half of loan applications under CBILS so far, compared with 79% for the BBLS. TheCityUK Recapitalisation Group (RCG), which represents Britain’s finance industry, has warned that about a third of the debt being taken on by British companies under the coronavirus lending programmes could be unsustainable. 

There have been unprecedented company support measures from the Treasury during the pandemic,” said Julie Palmer, Partner at Begbies Traynor. “But with government initiatives to support businesses now winding down, we will start to see the true impact of coronavirus on the UK during the autumn.”

Small business troubles 

SMEs have been stuck disproportionately hard by the impact of Covid-19. Fragile even prior to the pandemic, many are in industries most vulnerable to health and economic problems, including accommodations and food services, retail, and healthcare. 

With smaller margins, some may struggle to keep pace with re-opening requirements around staff safety and refitting premises to comply with social distancing rules. There are also no guarantees customers will return in pre-lockdown numbers.

Almost 80,000 people have signed a petition highlighting the “lack of meaningful government support” for the small business community across the UK, as part of the #ForgottenLtd campaign.

Former chancellor George Osborne has called for the government to write off the debts for SMEs, because the job market and economy would recover more quickly and it would help stop more businesses from going under.

“The hopes of a V-shaped recovery might be fading after the latest economic growth figures and the findings from our analysis demonstrate that SMEs have been hardest hit by the pandemic with another 16,000 SMEs plunged into significant distress since March,” says Shaun Barton, National Online Business Operations Director at RealBusinessRescue.co.uk.

“There are 1.7 million jobs at stake within these troubled companies and the pay-off from saving businesses one at a time is huge. For the directors of these businesses, they know that it’s not just their company at risk - it is the livelihoods of their workers.”

Facing up to change

More than four months after lockdown, insolvency experts are stating that many businesses will need to adapt in order to withstand the challenges of 2020 and prosper again in the medium-to-long term.

“If there was a sound and profitable business prior to lockdown then in most situations they should be able to mothball the business until such time as full restrictions are lifted and the business can be operational,” said Gary Lee, North West Partner and a specialist in business rescue and recovery at Begbies Traynor.

Cash flow projections are an ongoing necessity for firms, he said.

“Unfortunately, there will be companies and businesses that will not regain their pre-lockdown status and will not be able to trade on in their present state without some more formal restructuring and insolvency procedure,” he said. 

Speaking to all key stakeholders to ensure that support is provided wherever possible, either through delayed payments or cash injections, is a necessity, Lee added.

“Keep close to customers and supply chains to understand what else is happening in different geographical areas and other businesses,” he said.

Restructuring or exit

Restructuring can be extremely tough and choosing the correct approach is vital. Some options include creating a subsidiary company; moving around staff; corporate structure review; assets and re-financing. 

“We are working closely with directors, funders and other stakeholders to identify all options available to companies in order that they have the best chance of survival in these strange times,” said Lee.

“Seeking specialist professional help is essential to ensuring that the business is given the best chance of survival,” Lee said.

An exit can be defined as the owner’s plan to no longer be involved with the business. The exit strategy outlines now. Whatever the form of the plan, the earlier a business creates one and begins to prepare for your exit, the better their chance of achieving value from the exit. 

“We’re encouraging business owners and stakeholders to take advice as early as possible. At the first signs of business distress, we provide all businesses with a free consultation to help them navigate these turbulent times,” added Lee. “Unfortunately, many businesses leave it too late in seeking advice and options become limited. At an early stage, we can discuss ways to breathe new life into a business - if it’s still viable - and provide respite from creditor pressure until the business can stand on its own two feet again.”