Financing Your Business During COVID-19

small business financing
small business financing

The COVID-19 Pandemic has hit hard the global economy very hard.

Even though the restrictions of lockdown have eased in several countries, the economies will take a long time to recover from the ongoing crisis.

According to the International Monetary Fund, this has been the worst downfall since the great depression, projecting a massive loss of USD 9 trillion in the global domestic product over the next two years.

It is a challenging time for businesses, especially for startups operating with razor-thin margins. As cash is king, so knowing your small business financing options is critical.

Apart from the weak demand and revenue losses, the rapidly changing consumption patterns are few of the key reasons why the startups are going through the challenge of raising capital.

Funding activity is picking up after experiencing a a significant decline since the investors are willing to take higher risks in the hope of a higher reward.

Let’s discuss what your options are when it comes to financing your small business during COVID-19.

  • Government grants

GBP 25,000 Cash grants are available for the businesses in retail, hospitality and leisure sectors.

Eligibility:

  • Businesses operating from smaller premises, with a ratable value between £15,000 and £51,000

We suspect that a typical Central London based business may not qualify for this grant as property valuations are very high. Please check your lease agreements or contact your landlords. For details, please contact your local council.

GBP 10,000 cash grants ar also available for small businesses not in the above sectors.

  • Government loans

For smaller businesses, the Government-backed Business Bounce Back Loans Scheme is most attractive. Under this scheme, the UK Government will provide lenders with a 100%  guarantee for the loan.

Key highlights:

  • Amount: Maximum limit is £50,000 or 25% of the business revenue, whichever is lower.
  • Period: 6 years, the first year is interest-free
  • Repayment holiday: no repayment for the first 12 months
  • Interest rate: 2.5% per annum
  • Early repayment penalties: None
  • Loan application: The loan is easy to apply for through a short, standardised online application, with the funds usually to reach businesses within days (sometimes 24 hours), providing immediate support to those that need it as quickly as possible.

For large business customised loans are available. Requirements can vary, but all leading high street banks are asking for:

  • Cash-flow- at least 12 months
  • Latest filed accounts
  • Management accounts
  • Business plan including any contingency plan
  • Proving that it is the only cash-flow problem and otherwise business is thriving
  • Equity issue

The funding space for startups is not as active as last year’s, though Venture Capital firms are still seeking investment opportunities to increase wealth. Equity issue includes fundraising from existing shareholders (rights issue), new investors, Venture capitalists, angel investors and family and friends.

Valuations are lower for many sectors, and investors are keen to grab some bargain opportunities.  

  • Overdraft

Overdraft is usually a more accessible form of financing, no lock in periods and pay interest only when you use.

Banks are usually flexible in this challenging time. Interest rates are lower, so short term overdraft may be a good option.

Banks may require cashflow forecasts and management accounts before approving an overdraft.

  • Renegotiate

It is time to show your negotiation skills. Call your lenders, loan providers, landlord, HMRC and suppliers and renegotiate payment terms.

We all are in this together, and your business partners and lenders are usually aware of this fact.

We have seen instances where lenders are providing payment holidays; landlords providing rent-free period, supplier extend credit period.

So all you got to do, is talk and explain. Work with your accountant to draw up revised cosh forecasts identifying cash-flow deficit.

  • Defer/postpone non-essential expenditure

Most business sectors are in survival mode (there are few in assault mode- like e-commerce, delivery businesses, courier companies).

Once established that the business is in the survival mode, the next step is to postpone or defer all non-essential expenditure.

This may include refurbishment, business acquisition, dividends, marketing.

  • Which option is best for me?

It is a million-dollar question. Highly likely, a combination of all these will be the most optimum solution.

Talk to your accountant and prepare a summary of all outgoing- direct debits, credit card payments over the next six months at least. The aim is to identify the funding gap for the next six months.

Once you have the funding gap amount, then draw up the various permutations and combinations, starting from step 5- defer non-essential expenditure then step 4- renegotiate. If there is still any funding gap left, then Step 2, government Grants, and then step 1, Government loans.

After this point, it isn’t easy to generalise as each business is different.