Five golden rules of business fundingApril 6, 2020
The impact of the coronavirus crisis continues to dominate all forms of media. Although the information is plentiful, the fast-moving guidance and initiatives emanating from the UK Government often generates more questions than answers.
Whilst the introduction of the Coronavirus Business Interruption Loan Scheme (‘CBILS’) is clearly welcome, it does not give an automatic right to additional finance for any businesses. With the current lockdown having an increasingly dramatic effect on cash flow for many businesses, there is a danger that business leaders may feel compelled to abandon their usual caution and see CBILS as the only lifeboat in a sea of uncertainty.
So, at the risk of teaching grandmothers to suck eggs, here are our FIVE GOLDEN RULES OF BUSINESS FUNDING to help you make the right funding decisions.
FIRST GOLDEN RULE – ALWAYS GIVE YOUR EXISTING LENDERS FIRST OPTION – Talk to your existing lenders first – they should know your business well, be a valuable sounding-board and be able to act quickly. The more confidence a lender has in a management team, the more likely they are to offer flexible solutions and your existing lenders will know your management team better than anyone. Don’t let CBILS distract you from seeking other types of financial support that they may be able to provide. Lenders should check whether a loan on normal commercial terms is more suitable for you than a CBILS facility, but don’t rely on it. Do your own research. A lender may, for example, be willing to convert existing loans to interest only for a period, convert overdrafts to structured term loans, extend existing loan terms to lower repayments, temporarily waive or suspend financial covenants on existing loans or provide other types of credit facilities. That said, CBILS does offer some unique benefits, particularly for smaller businesses, so look at it as strong contender in a range of options.
SECOND GOLDEN RULE – PERSONAL GUARANTEES SHOULD BE A VERY LAST RESORT – Recent media coverage, and indeed Government guidance, has been heavily criticising lenders for requiring personal guarantees from directors as security for lending under CBILS. This requirement is changing almost daily, and it is quite hard to keep up at times. The important thing to remember is that the requirement for any form of personal guarantee is always at a lender’s discretion. Giving personal guarantees as security for business funding should always be a last resort but particularly when the economic future is so uncertain. It is important to remember that the Government guarantee under a CBILS loan is to the lender and not to you, the borrower. So, your business will remain responsible for repayment of 100% of the loan facility. If you are left with no option other than to give a personal guarantee for any element of a loan, always seek legal advice on capping your liability and on negotiating and drafting the guarantee document.
THIRD GOLDEN RULE – DO YOUR HOMEWORK AND PREPARE WELL – Much like any finance application under ‘normal’ circumstances, CBILS lenders will require detailed information covering your financial performance both prior to the virus outbreak and looking forward. You should consider illustrating trading comparisons pre and during the pandemic, what proactive mitigating actions you’ve taken to limit the cash impact on the business, how you plan to trade out post-virus and what the short and long-term impact might be on your market. Using recent management accounts, financial forecasts, debtor and creditor lists will provide valuable supporting evidence.
FOURTH GOLDEN RULE – DON’T SETTLE FOR SECOND BEST – If funding options presented by your existing lenders, under CBILS or otherwise, are unsuitable, resist the temptation to settle for second best. There are many different lenders in the market with different lending appetites who may be able to offer you more favourable terms. There has been a lot of media coverage about how banks should be fair to taxpayers and repay the support that taxpayers gave the banks during the financial crisis – keep this in the back of your mind as you approach any lender for funding. No matter how pressured you may feel, try to avoid being pushed into a funding arrangement that is not in the long-term best interests of your business. Taking independent professional advice on funding offers can buy you vital thinking time.
FIFTH GOLDEN RULE – FUNDING IS ONLY EVER ONE OPTION – Every crisis presents opportunities – look at the distillers and brewers now manufacturing hand sanitiser – so now may be a good time to look at restructuring your business or the way you do business. Many businesses we talk to are starting to think beyond the survival phase to equip themselves to take advantage of the upturn when it comes. The re-jigging of corporate structures and commercial arrangements with third parties is on the agenda of many businesses right now. Combine the skills of your own team with those of your professional advisers and funders and start thinking the unthinkable. There is no better time for clear thinking and for making the right judgment calls.