Even in Isolation, Lines of Communication Must Remain Open

As the COVID-19 pandemic continues to affect every aspect of the economy, now is the time for all businesses to draw up contingency plans and put them into action.

As the UK heads into another period of extreme uncertainty, many businesses will be turning to their contingency plans, and rightly so. However, in amongst all the noise from Government, there has never been a more important time to keep talking, especially for businesses and their banking institutions. This problem is not going to be short lived, so burying heads in the sand is no longer an option. Shakespeare Martineau banking partner Chris von Strandmann offers advice to businesses below.

With the latest wave of updates moving away from health to focus more on the economic impacts of COVID-19, contingency plans are bringing some relief to businesses in their time of need. For those who haven’t done so already, the single most important recommendation is to develop contingency plans and share them as early as possible with the business’ bank.

Rather than being too exact about the details – which are changing by the day – make sure the plan includes an impact analysis of a number of different scenarios. The most common areas for businesses to consider are impacts on the workforce and working environment, changing regulation, potential supply shortages, late payments and inflexible contracts, in turn, alternations to these could directly impact working capital, funding and loan arrangements, as well as other agreements with banking and financial institutions.

Working capital must be considered carefully. By stress testing some common scenarios, businesses will be able to understand the impacts on cash flow. For example, if additional stock is needed to protect against a shortage of supply or debtors delay their payments because their cash flow is under pressure; banks should be able to help alleviate the pressure on the business with temporary overdraft facilities. The Government is also bringing out multiple support packages to help them through the COVID-19 crisis.

At the core of most businesses are their people, and as the virus spreads and self-isolation is becoming a common occurrence, being able to operate on skeleton staff – or at least know what the minimum capacity is – will help leaders make crucial decisions or know when to speak to banks and lenders before it’s too late.

For those who haven’t done so already, the single most important recommendation is to develop contingency plans and share them as early as possible with the business’ bank.

With new employment regulations being added at the drop of a hat, businesses must make sure that they know what their obligations are. On March 13, the Government introduced a new regulation that stated that employees with symptoms of coronavirus, who self-isolate in accordance with published guidance, are now entitled to claim statutory sick pay from day one of their illness. Although it looks likely that the Government will refund these payments, the time lag before reimbursement could be significant. With the possibility of needing to recruit temporary workers, as well as extended sick pay obligations, cashflow could take a big hit and banks can provide a short-term capital injection while businesses recoup costs.

For many businesses, agile working is not a problem, but for some, an upfront investment of suitable IT equipment may be necessary to make this possible. Providing laptops, workstations and mobile phones to enable work to continue out of the office can be a costly exercise, but could make the difference between a business staying open, or not. Seeking funding options from the bank can help to keep your business going, without putting too much pressure on cash flow.

To ensure funding agreements with banking institutions don’t penalise businesses further in this time of crisis, it is worth having conversations at the earliest convenience to negotiate some flexibility if there are covenants in place. For example, some finance agreements will sometimes contain a ‘clean down’ condition requiring a business to keep its account in credit for so many days each month, and if cash flow tightens, it may find itself in a situation where achieving this may be difficult. Other covenants may be around leverage and the business’ debt servicing ability. If profits are expected to be impacted, this could trigger a breach of this type of borrowing condition.

It pays to be prepared and, of course, banks will want to be seen to be helpful. Last week, UK banks came out with a list of emergency measures, including suspending loan repayments and fee free emergency loans to help businesses overcome some of the current challenges they’re facing.  Various lenders have already announced the availability of fee free loans for businesses that are hit by the coronavirus outbreak and it’s likely others will follow.

Banks hate surprises and they won’t know what they aren’t told. Businesses must make contact with their banks at the earliest opportunity and shouldn’t be afraid to tell them exactly how it is – if there is a place for brutal honesty, now is the time. And, it is likely that many other will be having similar conversations too. Businesses are not alone and speaking to local authorities, banks and other business leaders should not be underestimated.

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