In Switzerland the process for applying for a Coronavirus business loan is as follows:
1. Fill out a one-page form online
2. Qualify for interest free loan of 10% of your annual turnover repayable in 5 years’ time
3. Receive money within a few days sometimes within hours
This simple process has enabled the Swiss government to lend over £12 billion to business owners so far.
The UK’s Coronavirus Business Interruption Loan Scheme (CBILS) doesn’t work quite like this. The government has received a great deal of criticism about the complexity of the application process and the time it takes to get a decision but their process, whilst frustrating does have some benefits for both business owners and taxpayers.
The most important thing to understand about CBILS is that it is a loan not a grant. This means that it will have to be repaid at some point in the future. The government will guarantee 80% of the loan amount but this guarantee protects the bank from loss NOT the borrower and whatever happens you will still be liable to repay 100% of the money. Therefore, before you take out a loan it is only reasonable for the lender to want to check that your business will be able to repay it. Frankly though even if the bank did not need to protect its interests you would still need to satisfy yourself that you will be able to repay the loan and that by pumping more money into your business now you are not just throwing good money after bad.
Over the last 25 years I have helped a huge number of my consultancy clients to write loan applications so here are some tips on the key things that your application will need to cover:
1. NET ASSET VALUE (NAV). If you trade as a limited company what is the net asset value of your business? (This will be stated in your last accounts.) How has the NAV changed since the end of the last accounting period? If the current NAV is negative, you may be trading whilst insolvent and this could disqualify you from getting a loan. (If you don’t know what trading insolvently means please stop reading this article right now and google it because the consequences of doing this can be catastrophic.) If you trade as a partnership what is the current balance of the partners’ capital account?
2. RUNNING COSTS. What are your monthly running costs? you will need to provide a detailed month by month schedule of expenditure for the last 12 months and for every future month until the loan is repaid.
3. INCOME. Under this crucial section you will need to set out exactly how many houses you need to sell or rent every month for the duration of the loan in order to break even. How does this compare with last years’ results? What assumptions have you made about the financial impact of the virus on the housing market? What have you based these assumptions on? Are you sure that your projections are realistic? What will you do if you miss your income targets? What other changes can you make in the business to boost your revenue such as increasing your fees or selling more conveyancing or mortgage services?
4. CASH FLOW FORECAST. You will need to provide a monthly cash flow forecast for last year and for every future month for the duration of the loan. The bank will want to see that you have enough cash to trade through the whole period of disruption in the housing market. The cash flow might look quite positive now after a good start to the year. You may also have deferred your VAT or have been given some grant money or a business rate refund. You may also receive a payment from HMRC soon to reimburse you for the cost of paying salaries to your furloughed staff. However, things may look very different in 6 months’ time when the full impact of the virus has hit you.
The final document might typically comprise half a dozen pages of figures and half a dozen pages of strategy that sets out exactly how you are going to achieve your stated objectives. The finished proposal must be clear enough to be read as a standalone document as you may never get to meet the person who makes the final decision.
A well written business plan will play an important role in helping you to get your loan approved on acceptable terms. Just as importantly though it will also play a crucial role in reassuring you that your business is viable and that taking a loan to support your business through this very difficult time is the right thing to do for you and your family.
Adam Walker is a management consultant and business transfer agent who has worked in the property sector for over 30 years.