The government has launched a range of initiatives to support businesses in response to COVID-19, yet there are still challenges and pitfalls ahead. Keely Woodley outlines the options available to the recruitment industry.
“Financial support announced by the Chancellor to help businesses survive the COVID crisis has added complexity to tough strategic decisions for recruiters hit hard by hiring freezes and delayed payments,” said Alex Evans, Programme Director of TALiNT Partners and head of its PointSix programme for recruitment leaders.
With a downturn in recruitment activity in the market, business-owners need to perform scenario-planning to stress test their business through a situation that could possibly last nine months. Businesses may have to work closely with lenders and utilise one or more of the government initiatives, such as the Coronavirus Business Interruption Loan Scheme (CBILS) and COVID-19 Corporate Financing Facility (CCFF). The first draw-downs are expected in early May, however, there are other self-help measures business leaders should be exploring in advance of this:
Business leaders must give attention to detailed cashflows within their modelling. Review all outgoings and engage with suppliers and landlords to set clear payment plans to defer expenses, if required. Lenders will expect you to have taken all reasonable steps to preserve cash before approaching them for extra facilities, advises Craig Cheetham, our Debt Advisory Director. He highlights, “forecasting is a really difficult part of presenting your business plan to lenders right now. No one knows how long the current measures will be in place for and when restrictions will begin to be lifted. It is important to consider what you think is a reasonable set of assumptions that apply to your particular business model, but also presenting a plan that shows the restrictions staying in place for a longer period of time – say 6 months”.
Headcount costs can be mitigated by reducing the number of working days for employees or entering the government’s furlough programme. 80% of a furloughed employee’s salary is covered, up to a maximum of £2,500 a month. This states employees must have been with the business since February, but this threshold will roll forward each month. A furloughed employee cannot work for the business while salary support is claimed. Petitions have been noted calling for a relaxation of this rule, but there is limited information on enforcement. Business leaders should model the salary impact of all employees under the three options;
Government advice to work from home presents new leadership challenges to the recruitment industry, with employees isolated from face-to-face contact with their teams. Management teams need to change their style with new methods to measure work-rate, while monitoring and supporting employee mental health and finding innovative approaches to communicating and motivating their workforce virtually.
HMRC have two key initiatives that can help the recruitment industry though COVID-19:
Deferral of any outstanding taxes to pay
VAT payment deferral of three months
These measures, however, only offer a deferral of tax, with the full amount still to be paid later. The HMRC telephone queues are sizeable, but front-line tax officers have the authority to grant deferrals with agreed repayment plans immediately over the phone.
Firstly, the Covid Corporate Financing Facility (CCFF) is targeted at large, investment-grade companies and requires a full credit rating with commercial paper purchased directly from the Bank of England.
Secondly, the Coronavirus Business Interruption Loan Scheme (CBILS) is targeted at small- and medium-sized enterprises (SMEs) with lenders able to make loans of up to £5 million. Applicable businesses must have revenues below £45 million and this must be calculated on the turnover figure present in group accounts rather than net financial income. There may also be a restriction on firms that are majority-owned by a private equity (PE) house or institutional investor, but that is still being confirmed.
Thirdly, the Coronavirus Large Business Interruption Loan Scheme (CLBILS) is the most recent initiative targeting larger businesses with revenues between £45 million and £500 million. Lenders will be able to make loans of up to £25 million with similar conditions to the CBILS. This scheme is not set to go live until the end of April 2020, and wider details are not yet known.
Typical bank lenders are providing the capital for the CBILS and CLBILS. The British Business Bank (BBB) is providing an 80% guarantee of last resort over any loans. Some lenders were previously asking company directors to provide personal guarantees for 100% of any borrowing. This position has now changed with no personal guarantees required for any facility smaller than £250,000 and a cap on personal guarantees of 20% on facilities greater than £250,000. Banks will enforce business security measures, such as charges on property, as a priority over the personal guarantee and the 80% BBB guarantee, which is only invoked after all other security avenues are exhausted.
Reasonable assumptions for a successful application
For a successful application to a bank for a CBIL, business owners need to provide a reasonable set of assumptions to show:
When the business is likely to run into cash difficulties over the short-to-medium term
How much cash the business will be in deficit
How long it will take the business to return to profitability and positive cash generation once the the situation has abated
Christopher McLean, our Partner in Debt Advisory & Restructuring advises, “companies that can clearly articulate their credit story to lenders, demonstrate the self-help actions already taken and in-progress, and illustrate how all stakeholders are contributing will find lenders and investors much more receptive to any requests”. Banks are receptive to early conversations, but it is important to perform the self-help measures first, demonstrate the analysis has been performed and the lender is not the only solution to ensure the recovery of the business.
It's likely banks will grant soft measures first, such as relaxation of loan covenants, so now is the time to review existing loan terms and assess if a breach is possible in each scenario. Lenders are also receptive to more-tangible measures for existing borrowers, such as payment holidays and rolling up interest for deferred payment. Lending to new customers has reduced, so be prepared to bring a sensible business plan to an existing lender.
A resolvable issue
COVID-19 presents an unprecedented challenge to the recruitment industry, but it is not insurmountable. Through detailed scenario-planning and effective engagement with lenders, business owners have the required tools at their disposal.