Dealing with the debt mountain

Now lockdown restrictions have been lifted across England, the majority of businesses have reopened their doors with the hope of seeing an increase in footfall and turnover.

Despite optimism within the business community that there will be a strong economic bounce back, one issue we hear time and time again when talking to directors is: how do we service the debt mountain that has been building up during the pandemic?

Bounce Back Loan repayments falling due

The commencement of the repayment period for businesses that took out a Bounce Back Loan under the government backed scheme will impact cashflow.

Under guidance from the British Business Bank, lenders have offered a number of initiatives to assist with short to medium cashflow under the Pay As You Grow banner, which include:

• Extension to the loan term from 6 to 10 years (at the same fixed interest rate of 2.5%)
• Repayment holiday of 6 months
• Interest only repayments for 6 months

Borrowers should contact their lenders directly if they want to make use of one, or a combination, of the above. Although the PAYG arrangements will lead to higher interest charges overall, they could be extremely helpful to a business which is regrowing following the pandemic.

Tax liabilities falling due

HMRC offer repayment plans such as Time To Pay agreements and VAT Deferral schemes.

Since December 2020, HMRC’s claims for PAYE and VAT rank as a secondary preferential creditor in insolvency procedures. Agreeing a plan with HMRC may help you negotiate with other, lower-ranking creditors.

Phasing out of the Furlough scheme

The furlough scheme provided a lifeline for many businesses that couldn’t trade during lockdowns.  The end of government support as employees come off furlough will inevitably affect a company’s cashflow.

Rent arrears

A backlog of rent arrears accrued over lockdowns is a common reason why companies are now balance sheet insolvent. Most landlords have been willing to enter into negotiations to assist with a company’s ability to continue to trade. Options include, arrears deferral or waivers and repayment plans, as well as moving to turnover-based rent for the future.

Negotiation with trade creditors.

Similar to HMRC and landlord arrears, businesses may need to negotiate with trade creditors and seek to amend existing payment terms in order to help with working capital.

Management costs

One of the most flexible expenses on a company’s Profit & Loss Account can be management costs. Owner-managers should consider temporary reductions on their own salaries and drawings to assist with cashflow whilst trading ramps up.

The government has recently extended the ban on the presentation of company winding up petitions and statutory demands to 30 September 2021, offering some respite to distressed businesses trading through the end of restrictions.

Should directors not be able navigate trading in the short term, we at Mercer & Hole may be able to assist with the survival of the business through the constructive use of a formal insolvency process.