7 steps to improving your chances of securing a business interruption loan

Mark Perrin - Menzies Accountant

Mark Perrin – Strategic Advisory Partner
DD: +44 (0)1489 566702

When your business finds itself in the midst of a financial crisis it’s important to recognise that effective cashflow management  is key. But what happens if everything possible has initially been done to manage cash but a company needs to secure vital additional  funding e.g. a business interruption loan, in order to continue trading? Is there anything  business owners can do to increase their chances of securing the money that they so desperately need?

The critical importance of cashflow forecasting

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Before starting any business interruption loan application, business owners need to have a clear understanding of their true cash position and how the Coronavirus crisis could change or impact cashflow in say three, 12, 24 and even 36 months’ time. Despite financial forecasting no longer being a mandatory addition to the Coronavirus Business Interruption Loan Scheme (CBILS), it is strongly recommended that business owners fully understand how changes to the cash position of the business could affect their ability to make future repayments.

Why else are cashflow forecasts valuable to businesses?

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As well as demonstrating best practice in business management, cashflow forecasts enable owners to make well-informed business decisions about how much money they may need to borrow and most significantly whether the loan is affordable. Without these insights’ owners could be making short term business decisions without an understanding of whether the business could survive or not.

Three-way forecasting is the most accurate and reliable forecasting technique and involves using well-thought-out assumptions and the preparation of monthly forecast profit & loss, cashflow and balance sheets. If put into place, these elements should integrate with each other to create a three-way forecast model that is more robust and enables ‘what if’ scenario planning. The model can then be used to stress test each scenario helping  business owners to understand the implications of making changes to its financial assumptions. An independent challenge of these assumptions by your advisors is always extremely valuable.

What are the key business cashflow risks?

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Although the Government’s support measures have been welcomed by businesses, there remain inherit cashflow risks that business owners need to note. Deferring tax and VAT payments, taking repayment holidays on bank loans and extending supplier payments can lead businesses into a false sense of security. The cash flow benefit from deferring such liabilities is positive in the short term but these liabilities need to be factored into future cash flow planning. This can be very sensitive, particularly as businesses will need additional cash flow to fund the recovery phase as the government attempts a phased return to social and economic activity.

All of these incredibly sensitive points need to be carefully factored into a robust forecasting model to help businesses make the best-informed decisions they can for the short term and medium term.   CBILS for example have a six-year loan term and once the initial 12-month capital repayment holiday has passed, businesses have just 60 months to repay the loan from post-tax profits. If the business takes longer to recover, or margins remain challenged, it may not be possible to make the necessary repayments in the designated timeframe. Using a three-way forecasting model however would put  business owners in a better position to conduct a sensitivity analysis and mitigate risks, enabling them to make the best-informed decision for their business.

Why create a robust cashflow forecast if the banks aren’t requesting one for a CBILS?

First and foremost, it is for the benefit of the business owners helping them to make the best-informed decision. In addition, owners need to demonstrate to the banks that the business is well managed and that the loan is affordable. It’s also important to consider that bankers’ time is limited, so loan applications need to be right first time.

7 ways to improve your chances of securing a loan under the CBILS

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Check and check again

It’s important to make sure your application is right first time. If there are any errors or gaps in the information, your application is likely to be significantly delayed or worse, rejected. We recommend you ask a trusted adviser to check it for you.

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Fact find thoroughly

One of the key tests for a loan under CBILS is to demonstrate that the business was viable before the Covid-19 crisis.  Therefore, take extra care compiling detailed information about the financial performance of the business from this time.

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Demonstrate affordability

Business owners and lenders need to have confidence that the loan is both affordable and that repayments will be met. The best way to achieve this is to provide the bank with a well-considered, three-way forecast covering the next two or three years.

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Reduce outgoings

Before applying for a loan, lenders want to see that action has been taken to utilise other initiatives encouraged or introduced by the government. Evidence of rent or capital repayment holidays, staff furloughing, and deferred tax/VAT arrangements should be provided.

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Challenge assumptions

Future business performance assumptions should be challenged. For example, what happens if gross profit margins fail to recover to pre-crisis levels due to reduced demand and downward pressure on prices? Similarly, product ranges may need to be consolidated or work phased in order to minimise health risks and reduce the need for upfront expenditure.

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Focus on cash-generative activities

Consider what the business might look like post-pandemic. Use management best practice to inspire lender confidence, stay focused on cash-generative activities and explain how the business needs to adapt.

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Practise positive communications

Demonstrate to lenders how your business is staying in touch with customers and suppliers throughout the crisis. This activity may uncover areas of sensitivity and minimise disruption when markets begin to recover.

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