The Covid 19 Economic Crisis – Our early thoughts and experiences

It is truly quite amazing how life has changed in a little over a month with the world and UK economies finding themselves on the edge of a financial precipice.

According to a recent Experian survey, half of the country’s small firms will run out of cash within 8 weeks without emergency funding.

However, it’s not just cash that’s the problem… the global “shutdown” means that apart from groceries and medical supplies, no one is buying anything… quite literally, demand for what the UK service-based economy produces has collapsed!

What’s more, given these unprecedented times, why would any business put itself into more debt when there is absolutely no indication as to when business can be expected to return to normal?

The rush of the government to provide assistance is admirable, but when first announced, the Chancellor failed to make it clear that Banks could offer the state backed interest free loans only if they were unable to lend to customers on “normal terms.”

We have all heard the recent stories of high interest rate requirements and significant personal guarantee exposure and we have also seen a number of businesses turned away with banks questioning the viability of businesses and their ability to service the loans in the long term.

As a consequence, the government has been forced to back track and last week, it was announced that Banks no longer had to offer normal loans before providing the emergency business loans.  These are interest free for 12 months and the government has further ordered the Banks to remove the requirement for directors to provide personal guarantees for loans of up to £250,000.

For loans over that threshold, Banks cannot ask for guarantees in excess of 20% of the loan as the government are underwriting the 80% balance.

As things stand, however, the governments guarantee is to the Bank – and not the borrower.  Therefore any business taking out these loans – where the interest rate has not been capped by government, will be 100% liable to pay them back with a 12 month deferral.  The debt and interest must still be paid and many small business owners are reluctant to expose the business to further debt!

It also remains somewhat of a frustration that these schemes, after the initial 12 months, face interest rates in excess of 8% when the official rate is still just 0.1%

That said it’s not as easy as picking up the phone and will come as no surprise that Banks are facing operational challenges in processing loan applications, as call centres deal with an unprecedented increase in applications.

Such business support initiatives must be welcomed, and will be money well spent if it does keep well managed businesses in “hibernation” and bring them back again.  However, the worry is that staff retained under the furlough scheme, were ultimately to become the victims of later cost cutting measures when some form of normality resumes?

Also, in my experience, a manufacturing plant is not necessarily that easy to “switch back on” and it is likely to take months for the business to get back to any form of normality and rebuild its sales.  This will be further compounded when the deferred VAT payments and other initiatives come to an end which is to some degree simply “kicking the problem” down the road for another few months.

Quite simply, it is difficult to see how many firms will survive what for many has been a complete loss of trade for the foreseeable future and there are undoubtedly “big names” edging closer to extinction…

The social lock down has affected many industry sectors with retail, leisure and tourism being severely hit.  The car industry is likewise affected as is manufacturing with employees forced to stay at home.  This has resulted in the number of people registering for universal credit rocketing by 1 million in just 9 days despite the government pouring money into job retention schemes. This is not a total surprise as whilst we are hearing of numerous businesses taking up the furlough option with staff, the scheme is still not fully live and with some distressed businesses, simply continuing to pay the staff while waiting to make the claim on the government is not an option.

With such a significant number of employers turning to the furlough scheme as turnover dries up, can we really be certain that all furloughed workers will be able to return to work and how many are simply on the stepping stone to redundancy?

Against all this, the government has committed a huge resource by way of business grants, business rates relief and VAT holidays, loans and loan guarantees.  Whether this will be sufficient simply remains to be seen… but the shockwaves are certain to cause a shakeout in the economy which will push weaker companies over the edge. 

We have already witnessed Carluccio’s restaurant change, Laura Ashley and Debenhams file for Administration with Kath Kidson also rumoured to be on the brink.  There are also rumours that P&O Ferries and Easyjet have asked for government support.

This creates a further moral debate as to whether businesses should be rescued and more importantly which ones?  Is it appropriate to provide Easyjet with the rumoured £600m rescue package just weeks after it paid out £174m in dividends to its shareholders?  This is direct contrast to the deal negotiated by British Airways and Trade Unions insofar that the furloughing of 30,000 employees will not lead to redundancies.

Employers of decimated workforces also face similar moral dilemmas. In an effort to cut costs we have seen many firms place significant numbers on furlough, often limited to the 80% underwritten by government where they are not allowed to work.  This has also resulted in the remaining workers facing similar wage reductions but continuing to work and cover the areas of their furloughed colleagues who stay at home for the same money!

The furlough scheme has obvious benefits for sectors such as hospitality where there has been a global shutdown and wholesale cancellation of events.  However, for businesses that are struggling to trade through the current difficulties, perhaps a similar subsidy to keep employees working, even from home, would prove an equally and potentially more valuable lifeline for business rather than sending workers home unable to work.  If trading isn’t necessarily required to be mothballed in its entirety, it will be easier to “restart” fully once the crisis subsides.

In reality, there are no easy solutions and we must all hope that the shutdown is minimised as far as possible, otherwise I fear a number of previously healthy businesses will be lost forever.