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How to... survive the coronavirus cash crunch

06 April 2020
How to... survive the coronavirus cash crunch

Businesses are experiencing unprecedented disruption, but there are practical steps that operators can take to preserve financial viability. Christian Mole explains

The Covid-19 crisis is unique in its combination of challenges for the hospitality sector. Businesses are experiencing unprecedented disruption, with hotels, pubs and restaurants almost all closed for business. Consequently, a huge proportion of the sector is now facing an immediate cash crunch. However, there are practical steps that operators can take to preserve financial viability.

Access to government support

Understanding what is available and how it can be accessed should be an absolute priority.

Smaller hospitality businesses eligible for Small Business Rate Relief can obtain a cash grant of £25,000. Local authorities should automatically contact eligible businesses.

The Coronavirus Business Interruption Loan Scheme (CBILS) helps smaller businesses access bank lending and overdrafts. Loans up to £5m will be interest-free for the first year. The latest government amendments to the scheme mean that lenders are banned from requesting personal guarantees on loans under £250,000.

However, borrowers do need to demonstrate that they were viable businesses before Covid-19, that sensible actions such as furloughing have already been taken, and that there is a post-crisis recovery plan demonstrating a path towards profitability and cash generation. There are more than 40 accredited lenders for CBILS, so it may be easiest to first approach existing lenders that are scheme participants.

Borrowers do need to demonstrate that they were viable businesses before Covid-19

For larger corporates, the new Covid-19 Corporate Financing Facility (CCFF) allows the raising of short-term finance through the issuance of commercial paper purchased by the Bank of England.

Following criticism that many companies fall between these two schemes, the government has announced an extension to CBILS for firms with annual turnover of £45m-£500m, providing an 80% government guarantee for bank loans of up to £25m. These will be offered at commercial rates of interest.

Credit lines

Companies may consider drawing upon contingency funding and speaking to lenders to increase or extend existing credit facilities outside government-backed schemes. You will need to demonstrate that you have a viable business under differing scenarios. Inevitably, there is significant demand and businesses need to be prepared for delays.

Rapid cost reduction

Businesses need to urgently reduce cash outflows and should seek payment deferrals for significant costs such as rent, VAT/PAYE/NIC and other non-essential services at this time. We would recommend caution with regards to pension contribution deferrals.

Rent concessions

For tenants weighing up whether to make rental payments against the risk of forfeiture, the government has implemented a moratorium whereby commercial landlords are prevented from exercising this right until at least 30 June 2020, where non-payment of rent is due to Covid-19. Any current forfeiture proceedings cannot result in the tenant being asked to give up possession until at least 30 June 2020.

However, unless the scheme is further extended, the right to forfeit will be reinstated after 30 June 2020, making tenants potentially liable for six months' rent at that point. Withholding rent on a unilateral basis may therefore be unattractive and a specifically negotiated and agreed rent concession may be more appealing. This could include overall rent reductions for an extended period, deferral of rents subsequently added to the end of the existing lease, rent-free periods or changes to the usual payment cycle, for example quarterly to monthly payments.

Unless the scheme is further extended, the right to forfeit will be reinstated after 30 June 2020, making tenants potentially liable for six months' rent at that point

There are currently mixed reports around landlord flexibility: some larger landlords may be in a better position to grant rent reductions or rent-free periods, while smaller landlords may find this more difficult.

As with approaching lenders, supporting materials and well-structured requests increase the likelihood of success. Be proactive and clear about the concession you are seeking, how long you will need it for and how you intend to catch up.

Employee costs

Under the Coronavirus Job Retention Scheme, it may be possible to reduce payroll without having to make immediate redundancies by placing staff on furlough: all UK employers can access support to continue paying 80% of furloughed employees' salaries, up to a monthly cap of £2,500 per employee per month. The scheme is backdated to 1 March and is open for an initial three months, with the potential for further extension.

However, some details of the scheme that may be relevant to hospitality sector remain uncertain and require clarification. For instance, will Tronc payments, common in the restaurant sector, be covered?

Small and medium-sized businesses (fewer than 250 employees) can also reclaim up to two weeks' Statutory Sick Pay per eligible employee, paid for sickness absence due to Covid-19.

Tax payments

All UK VAT-registered businesses can defer VAT payments due between 20 March 2020 and 30 June 2020 until the end of the tax year, with no interest arising. This is an automatic payment holiday and no application is required.

All businesses in financial distress and with outstanding tax liabilities can request support with their tax affairs through HMRC's Time To Pay service. The arrangements are agreed on a case-by-case basis. HMRC is currently offering a one-off, three-month full deferral of the liability, covering PAYE, NIC and corporation tax.

We strongly recommend engaging with HMRC before a payment becomes due and not unilaterally delaying payment of tax due. Given the volume of requests, there are significant delays on HMRC helplines.

The government has also introduced a business rates holiday for retail, hospitality and leisure businesses in England for the 2020 to 2021 tax year. No actions need to be taken to claim the holiday, although local authorities may have to reissue bills to exclude the charge.

The government's announcements are not the only ways to manage cash tax. There are other tax-related measures, are not specific to Covid-19, to help with liquidity. Check level of VAT instalment payments and revisit capital allowances claims for earlier periods.

Positioning for recovery

Covid-19 is an unfolding event that is bringing uncertainty to every business. However, while the coming weeks and months will be exceptionally tough, the longer term forecast trends for leisure, travel and eating out are positive. Planning for recovery and considering how your business is best placed for a post Covid-19 world is key and will be helpful in maintaining stakeholder support through these difficult times.

Christian Mole is UK and Ireland head of hospitality and leisure at EY

Photo credit: Shutterstock

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