The current downturn is making life very difficult for small businesses across the country. Corporate insolvencies are constantly rising and, while consumer confidence may have bottomed out, trading conditions remain tough in virtually every sector.
Small businesses are, in many ways, being hit hardest by the recession. Without the financial or negotiating power of larger corporations, and frequently with severely restricted credit flows, many small and medium sized enterprises (SMEs) are struggling to prevent layoffs or cutbacks. In the worst cases, they are struggling to avoid closing their doors altogether.
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The government has recognised the scale of the problem facing British small businesses. Aware that SMEs are on the front line of the recession and of the fact that any economic recovery will depend on the small business sector, the government has announced a series of measures and packages aimed at helping Britain’s businesses.
However, the apparent difficulty of applying for much of this help, coupled with a perception that most businesses will not qualify, has meant take-up is low. A combination of reticence on the part of businesses, inflexibility on the part of banks, and disorganisation on the part of the government, has meant, for example, that only £40million of a new £1.3 billion loan guarantee scheme has been used.
The range of help available means that your business has a good chance of qualifying for some government support - but you need to know what is on offer, and where to get it.
A constriction of credit has been amongst the most significant problems facing small businesses since the onset of the crisis. With sales down across the board, and pre-arranged credit facilities being withdrawn at very short notice, many SMEs are facing potentially disastrous cashflow problems. However, there are a number of government initiatives aimed at easing this pressure and encouraging the banks to lend to small businesses.
The government currently offers two loan guarantee packages. The scheme to which you should apply will depend largely on the annual turnover of your business. However, regardless of the option you apply for, it is important to remember that these are still commercial loans; the loans are made not by the government, but by the banks. As such, they will still be assessed against commercial lending criteria; if you cannot demonstrate that your business is viable, you will not be given a loan.
The first scheme is the Enterprise Finance Guarantee (EFG), which is aimed at improving SMEs’ working capital positions. This is achieved through new term loans, an extension of existing loans that would otherwise expire, or the conversion of overdrafts into term loans. It is available to businesses for the purposes of improving cashflow and encouraging investment for growth.
The government has pledged to guarantee up to £1.3 billion of loans through the EFG, with each business able to apply for a loan of between £1,000 and £1 million (Editor’s note 2018: the upper limit has now been raised to £1.2 million). Furthermore, eligibility is restricted to businesses with a turnover of up to £25 million (Editor’s note 2018: the upper limit has now been raised to £41 million). Businesses dealing with agriculture, coal, steel or certain exports will not qualify for EFG help.
The second guarantee scheme is the Working Capital Scheme (WCS). Under this arrangement the government will guarantee up to £20 billion of loans, far more than the amount available under the Enterprise Finance Guarantee. The WCS is available to businesses with a turnover of £500 million or less. Unlike the EFG, its aim is to increase all types of business lending. As such, WCS guarantees can be sought for any lending above that which your bank would otherwise offer (Editor’s note 2018: government information on the WCS has been replaced by the shipment-related Export Working Capital Scheme).
You may also consider equity financing as a method of raising new funds. This involves selling part of your business to a new or existing shareholder. While private venture capital or ‘business angel’ funding is very difficult to come by in the current climate, the government has set up its own capital investment fund. The Capital for Enterprise Fund (CFE) is a £75 million scheme that buys debt in exchange for equity. The fund is open to businesses with a turnover of up to €50 million, and will provide equity of between £250,000 and £2 million for eligible companies. In order to qualify, your business must have a viable business plan, a roadmap for growth, and a demonstrable need for capital. Clearly, you must also have sufficient equity to sell (Editor’s note 2018: this fund is now closed).
Aside from help raising finance, the government has also launched a number of initiatives to help free up working capital and ease strains on cashflow. Amongst the most potentially useful of these is a scheme that allows businesses to spread their tax payments over a longer period. The Business Payment Support Service is an HMRC helpline set up to deal with businesses that need more time to pay their tax bills.
The Support Service is designed for those businesses that are concerned about meeting their forthcoming obligations for corporation tax, National Insurance contributions or VAT, or think that an impending tax bill will cause them financial problems. The helpline is open Monday to Saturday, and staff will try to agree a temporary solution to your cashflow problem. This will generally involve an extended payment period for your bills. While you will not incur any late payment fees for these arrangements, you will have to pay interest on the outstanding balance.
You should note that the Business Payment Support Service is only suitable for those with new payment enquiries. If you have already received a reminder about an overdue payment, you should contact the issuing office rather than the Support Service.
The government has also promised to speed up tax repayments. If HMRC owe you a tax refund by bank transfer or to your card, you can now expect to receive most payments within 5 working days.
While there is a significant amount of help available for small businesses, there are always caveats. In the first instance, the onus is on you to seek help, rather than on the government to get in touch. No-one will know that you are having difficulties unless you contact the relevant agency.
The second important caveat relates to fundraising. The government is not lending directly to businesses, although the process of quantitative easing will probably result in them buying up corporate bonds. Currently the government is guaranteeing commercial loans - this is an important distinction. Government guaranteed loans are designed for viable businesses that are in temporary difficulty. If your business does not have a demonstrable plan for the future, or if its difficulties are due to a poor business model rather than the effects of the downturn, you will struggle to persuade a bank to lend to you regardless of government guarantees.
The overarching point, however, is that small businesses need not suffer in silence. There is a vast amount of help available, much of which has as yet gone unclaimed. If you are struggling to cope with the effects of the downturn, you should take all the help you can get - it is simply good business sense.