More than half a million UK business at risk

Before the UK economy went into lockdown, the Begbies Traynor Red Flag Alert index was highlighting 500,000 businesses in distress that were not yet caught in formal insolvency processes.

With a three-month lockdown potentially reducing the UK’s 2020 GDP by 35%, “It won’t take much to push 200,000-300,000 more into trouble. Like FlyBe, this crisis could be the final nail in the coffin,” Palmer told AccountingWEB.

As the impacts reverberate through the small business community, “We estimate that 800,000-1,000,000 companies could be at risk of failure,” she added. “Just 10% of that equals five times the normal failure rate.”

Business support measures such as the job retention scheme and business interruption and bounce back loans will give business owners short-term lifelines, but may only delay the final crunch. The loans are not free money and will need to be paid off.

“The really dangerous time for businesses won’t be in the crisis, but when the taps are turned off and they try to get going again,” Palmer warned.

How damage will play out

Legal courts have not been sitting during the lockdown, so winding up orders and county court judgements against companies have been held up. And HMRC petitions have been running at 50% of their normal load, according to stats the insolvency practitioner has been tracking.

“Holding the figures down now means that the impact will be bigger when it finally breaks out,” said Palmer.

“On a macroeconomic level, there’s the unknown quantity of consumer confidence. Even when the lockdown is eased a lot of people may not be comfortable going out to dinner or going to shops. Travel, tourism and hospitality were the first industries to suffer and they will be the last to emerge. It could be many months before we see the full impacts.”

The other big economic factor for business survival will be how the government decides to unwind the lockdown. Will it leave businesses to stand on their own feet, or soften the impacts with longer-term measures to ease movement and meeting restrictions?

When the taps turn off

The government was clear that the business support loans were intended to help good businesses weather the Covid-19 crisis rather than prop up ones that were already struggling. The longer the crisis goes on, however, more businesses will slip into the danger zone.

“Unviable businesses will start falling over in large numbers,” said Palmer. “In terms of natural selection, it’s almost Darwinian. Businesses that are adaptable and fleet of foot will be the ones that survive.”

Life after crisis

Right now the focus for any accountant is on surviving the crisis. For practitioners, their advice is about how to get cash in and stop cash going out. That will include a lot of work on the business support measures, she continued.

“When we get to normality again, accountants will need to move out of their comfort zones and look at how far the support measures can take their clients. What will the business and its cashflow look like at that point? And how do they plan to repay any loans?” Palmer asked.

“It’s almost like starting again.”

Looking at cashflows for the next 12 months, there will be another crunch point in January 2021 when deferred VAT and income tax payments come back into play, compounded by next year’s tax liabilities, payments on account, rent and other recurring costs.

For some companies, those forecasts will start to reveal the gaps between the cash they expect to have and the amounts they are going to need to pay. And if there are visible gaps already, the directors are going to need options.

Already the Begbies Traynor partner reports an “uptick in enquiries” including some from very substantial businesses wanting to know about different restructuring scenarios and insolvency options.

“It’s appropriate to seek specialist advice at this time,” said Palmer. “If nothing else, by taking advice you give yourself a cloak of protection. If someone says you didn’t act correctly, at least you can say you took advice.”

For more practical advice from Julie Palmer on bounce back and coronavirus business interruption loans, recovery strategies and dealing with companies in crisis, watch our 6 May Coronavirus Q&A webinar.