Loans increase cashflow risks
Aside from the various rate reduction schemes, grants linked to the occupation of business premises, the furlough scheme and the Self-Employed Income Support Scheme, all other sources of government support for SME’s are a bewildering array of government backed loan schemes.
As we said in a post last week, a cash grant (treated as income) is better than a bank loan (treated as a repayable liability).
By offering these loan guarantees, government is shifting the support it is offering from current expenditure to some future date when and if banks are forced to call in the government guarantees.
By taking the loans, businesses are increasing their costs – after discounting any initial government assistance – and adding loan repayments to their cashflow forecasts.
Another way to consider this latter point means that businesses will need to make more profit to cover the interest costs, and more importantly, generate additional profits to fund the loan repayments.
Which is why planning prior to taking out loans is paramount.
This planning process will serve two functions:
- Provide you with the evidence that a loan can be managed, and
- Provide you with a report to support your loan application.
If you cannot claim COVID-19 generated grants, and need to plug your cashflow gap with a loan and are unsure how to undertake the necessary forecasting process, please call.
