UK SMEs unprepared to apply for loans

Many UK SMEs are unprepared to apply for the government’s Coronavirus Business Interruption Loan Scheme, says Richard Simms, managing director at FA Simms.

“If a business is going to apply for loans, they’ll need to provide quite a lot financial information, they need to have financial forecasts and information for a business rundown. Because not every business is necessarily running their accounts, day to day they’re not necessarily going to have that information available.

“I think that’s where the support needs to comes from, the lead will need to come from accountants. They will need to be providing more manual information to their clients to make sure when they apply for this finance, that they have the information available to do so. Especially since that skill set, applying for loans, is not a skill set someone has to use all the time.”

With nearly every sector being adversely affected by coronavirus, most businesses will need financial support. But with so many facing hardship, Simms says it is difficult to determine which are healthy enough to survive the crisis and thrive afterwards.

“How do you tell in the short term whether in fact the issues the business is facing are to do with the current circumstances or whether in fact they have longer term issues?”

Analysis by KPMG found that in 2019, somewhere between eight and 14 percent of UK companies exhibited ‘zombie-like symptoms’: businesses surviving because of low interest rates. By sector, more than one in ten companies in the leisure industry were classified as zombies.

The Coronavirus Business Interruption Loan will provide loans of up to £5m to SMEs. However, businesses will be offered normal commercial loans first if they meet certain requirements.

The British Business Bank lists one of the criteria that an applicant business must have as: “a borrowing proposal which, were it not for the COVID-19 pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable your business to trade out of any short-to-medium term difficulty.”

If a firm is in good financial health, Simms says accountants should do everything to encourage their clients to utilise government support.

“If the business is under pressure from just the impact of the virus, we should definitely encourage them to draw breath and apply for loans.”

While government loans and grants will help keep businesses solvent for the next few months, the question becomes what will happen once loan repayments begin and tax deferments end. Simms warns that businesses may ‘give up’ opting to liquidate and start again.

“In two to three months we may be in a situation where people ask ‘why would I pay [the loan] back, I’m just going to close and start again?’ Start again because the natural thing to do will be perhaps to drop the existing company, drop the liability the company has, and restart in the future.

“If the government doesn’t take steps to address the future shortfall, then basically we’ll have substantial amounts of liquidations if companies close and restart knowing they can’t manage their debt payments going forwards,” says Simms.