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Coronavirus – The good, the bad and the ugly for SMEs

By freshthinkingcapital

Posted on 31st March 2020

The coronavirus (AKA the Covid-19 virus) is something we’re sure everyone is well acquainted with. Following its tremendous media coverage over the last 3 months and the sudden massacre of hand sanitiser and toilet paper off the supermarket shelves, the virus has become a global talking point.

So far, the virus has surpassed 100,000 cases, flight bans are prevalent, businesses are shutting down and the global stock markets have begun to tumble. As always, experts have varied opinions on the severity of the virus, but if one thing can be agreed upon, it is that the virus has caused great amounts of apprehension and uncertainty, leaving ominous dark clouds looming over the future forecasts for SMEs and global businesses.

In this article, we outline 6 potential difficulties SMEs are likely to face as a result of the virus outbreak.

 

1. Supply Chain Disruption.

 

In the 21st century, the modern-day business has streamlined their supply chain process with lean-synchronisation strategies and complex information systems to reduce the level of inventory being held and the costs associated with this by adopting a just in time approach. This has proven to be very effective, although, with factory closures in China, businesses are now struggling to source certain raw materials for their products.

Some supply chains have become so disrupted by the virus that smartphone maker Samsung and car manufacturer Jaguar Land Rover have been flying parts out of China via suitcases amid factory closures to avoid stopping their production lines altogether! Making it evident that businesses who lack flexibility in their supply chains are at incredible risk.

FCA chief executive officer Andrew Bailey made the prominent statement that this is “the first most pressing issue we face and it is reasonable to suspect that at some point we will have to provide supply chain finance to ensure the shock effects of the virus are not damaging.”

 

 

 

2. Banks/Lenders losing the appetite to lend to certain sectors.

 

Whilst a number of banks are trying to mitigate against the negative impact of the virus by offering support to those most affected, such as NatWest’s pledge to lend £5bn in working capital finance to support SMEs during the coronavirus outbreak, the appetite to provide new funding to businesses is looking bleak. Especially for the sectors that are most prone to the uncertainty resulting from the virus such as travel and transport, supply chain and freight and food and hospitality.

A comprehensive review by Rangewell reported that some banks are beginning to cancel all external meetings and events until further notice. In addition to that, some lenders are beginning to revisit deals that have been approved and pull credit offers due to “criteria changes” as a result of the virus. As was seen in 2008, if SMEs ability to access finance becomes more difficult, economic growth will consequently be at risk.

Despite some lenders being more cautious about lending, alternative funders are looking to display their worth in this uncertain market by their nature of taking a deeper look at SMEs requests for funding. Instead of halting operations entirely by using their faster, more reactive and fluid nature to look for solutions.

2. Forced Remote Working.

 

Due to the advised 2-week isolation for people who have had symptoms of the virus, some companies have instructed all workers to work remotely to avoid contracting the virus.

For operations that offer a tangible service or product, this has proven to be very disruptive. Although, companies such as Microsoft have been at the forefront of the remote working solution, instructing large amounts of their staff to work from home. A positive of this is that it could display an ability for global companies to be less reliant on offices and show the capability to transition to remote working conditions quite seamlessly, producing new and innovative ways for widespread company communication and interaction. Diminishing the impact a crisis like this might have in the future.

 

4. Cash Flow Issues.

 

As a result of business closure, staff sickness, lower customer traffic and supply chain disruptions, this will ultimately lead to cash flow issues. Businesses such as restaurant’s and airlines, that are common for operating on extremely low margins with large overheads, will be one of the many types of businesses that suffer greatly from this pandemic.

 

5. Property prices and a stock market crash.

 

The last week of February saw one of the worst stock market crashes since the 2008 financial crisis. However, UK housing prices have hit a fresh peak according to Halifax, increasing by 0.3% (£8,000 more on average than September last year). A sustained level of buyer and seller activity is strong compared to recent years, but as the stock market continues to decline due to the uncertainty of the worrying snowball effect of closures and supply chain disruptions that has yet to truly impact businesses, this could soon change. Rangewell has indicated that some property valuers have signalled that property valuations may be delayed or underestimated as a contingency, and if properties cannot be valued or prices are affected, this will ultimately cause an issue to SMEs looking to obtain finance as lenders will be more reluctant to lend.

 

6. Sick Days.

 

The normal legislation for sick days under the current rules requires businesses to pay statutory sick pay after four days. Although, because of the recent outbreak, in a recent press release by the government, emergency legislation has changed to allow the payment of statutory sick pay to take place from the very first day someone is sick. Exaggerating that “no one should be penalised for doing the right thing.” For the self-employed and SMEs who are reliant on a small number of staff for operations, this can be costly. Although, following the new 2020 budget announcement, the chancellor has put in place various support mechanisms (such as the ESA) to help the self-employed and small businesses.

 

How are businesses mitigating against the disease?

 

1. Insurance

 

If a business has had to close or has had any justifiable adverse circumstance negatively affect the business, this may be covered by insurance. Advice from the FSB advises that SMEs check their insurance or consult with their insurance broker to see if they have business interruption cover in their commercial insurance policy.  This insurance can cover businesses for the income that they lose in the event of a disaster. It is important to check if the policy has the add on for notifiable diseases in the policy wording first to see if the business might be eligible.

2. Government tax concession plan

 

For businesses encountering short-term cash flow problems (for example, as a result of softened demand), a useful mitigation service currently exists in HMRC’s “Time To Pay system.” Although, this is only considered and accessible on a case by case basis if a firm or individual contacts HMRC about falling behind on their tax directly.

In addition, the UK Government is advising businesses to build their own resilience by reviewing their business continuity plans and following the advice for employers available on GOV.UK – https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19

 

3. Banks relaxing interest fees and offering contingency funding.

 

For customers who currently have an outstanding loan, banks are being very accommodating in terms of offering support to existing clients. For example, NatWest is setting up a £6.5bn initiative to support SMEs across all sectors where the disruption has influenced businesses the most. This will include emergency loans with no fees, loan repayment holidays and various programs to proactively reach out to SMEs and offer advice.

Additional banks like TSB and Lloyds have also said that they would allow mortgages windows, savers the opportunity to close fixed-term savings accounts without incurring any penalties, refunds on credit cards and an increase in temporary borrowing limits.

 

Summary

 

Whilst businesses, the economy and people’s health have taken an unfortunate turn for the worst, fiscal and monetary policies alongside positive initiatives and good advice seem to be mitigating the situation as much as possible. Call it Darwinism or whatever you may like, but as the business world becomes more accustomed to crises, it does seem as though we are in a better position to combat them more effectively in the present and future with the profound lessons that have been learnt.

Remember, we’re here to help businesses. With a consistent approach to lending criteria and speed of delivery, we always look for a solution to deliver the funding required. We appreciate crisis can be a time for business opportunity, should you require advice from the team, don’t hesitate to get in touch.

 

 

 

Sources:

Guardian – https://www.theguardian.com/world/2020/mar/03/banks-issue-emergency-loans-to-firms-hit-by-coronavirus-crisis

World Health Organisation: https://www.who.int/news-room/detail/07-03-2020-who-statement-on-cases-of-covid-19-surpassing-100-000

FSB Insurance: https://www.fsb.org.uk/resources-page/advice-to-small-businesses-and-fsb-members-about-the-novel-coronavirus-covid-19.html

GOV Sick Pay: https://www.gov.uk/government/news/sick-pay-from-day-one-for-those-affected-by-coronavirus

Rangewell: https://rangewell.com/article/lender-pulse

NatWest £5bn pledge: https://www.rbs.com/rbs/news/2020/03/natwest-pledges-p5bn-working-capital-support-for-smes-during-cor.html

Andrew Mcbailey quote: https://www.ftadviser.com/fca/2020/03/04/fca-to-review-firms-plans-on-coronavirus/

Housing prices up 0.3%: https://www.theguardian.com/business/2020/mar/06/uk-house-price-recovery-at-mercy-of-coronavirus-warns-halifax

Government help on tax: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/869827/Coronavirus_action_plan_-_a_guide_to_what_you_can_expect_across_the_UK.pdf

https://www.bbc.co.uk/news/business-51817947

Employment and support allowance: https://www.gov.uk/employment-support-allowance

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