The debt problem

Until March 2020, the UK economy was strong and low interest rates meant that inexpensive finance was readily available, so businesses geared up to enjoy growth and success. We now see a sudden reversal of fortunes, with Brexit and COVID-19 uncertainty continuing to test resilience and ability to repay.

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Claire Burden
Published: 27 Nov 2020 Updated: 13 Apr 2023

Until March 2020, the UK economy was strong and low interest rates meant that inexpensive finance was readily available, so businesses geared up to enjoy growth and success. We now see a sudden reversal of fortunes, with Brexit and COVID-19 uncertainty continuing to test resilience and ability to repay.

This finance, plus recently-taken Coronavirus Business Interruption Loans (CBILS)and HMRC deferrals need repayment. Forecasts prepared for repayments are likely to be underperforming, particularly given the majority of CBILS repayment forecasts provided to banks did not account for a second lockdown, even as a sensitivity.

Given the level of risk and uncertainty, it is prudent for directors to consider bringing in advisory support to ensure fiduciary duties are met and the best outcomes are achieved. So, why is Smith & Williamson LLP different from the rest? One important aspect – industry experience.

With many years’ experience working in Board roles for stressed businesses (including high growth businesses facing working capital pressure) paying down debt and refinancing, the team knows what it is like to be responsible for having to deal with uncomfortably low levels of cash, and how hard it can be to turn losses into profits.

The concern about being able to make debt or payroll payments next month, or how to implement cost reductions without losing the best people, or what analysis lenders require to be able to consider loan repayment holidays or extensions.

Our team combines this knowledge with advisory expertise, working with a wide network of lenders and having visibility of market responses and trends. This means we are best placed to successfully steer you and your business through these tough times. As advisers, we have been where you are now and can truly help, with real world solutions and insight combined with practical implementation.

Adapt to survive

It goes without saying that directly impacted businesses must adapt to ensure survival. Many are - the immediate implementation of remote working across huge numbers of office staff in the spring was incredibly successful and shows just what can be achieved under pressure. This mindset applied with the same urgency to financial challenges would be transformational to outcomes.

Success in dealing with these challenges usually centres on how early help is sought and the strength of relationships with stakeholders.

We expect a wave of additional funding and repayment extension requests to lenders, who will, as a minimum, require additional analysis and revised forecasts to consider requests, which is often more credible when prepared with support from an adviser. Alternative options also need to be sought in case applications are rejected.

As HMRC’s position as a preferential creditor comes into effect from 1 December 2020 and the likely tightening of bank covenants and stricter adherence thereto as a result, lending will become ever harder to obtain, so the right advice could be crucial.

We specialise in rolling up our sleeves, getting involved and providing urgent, immediate support, to give your business the best possible chance of survival.

What next?

It might feel like there is no time left to think of anything else during the firefighting on immediate cash pressures, Brexit planning and lockdown change implementation. However, it is vital to invest in adapting strategy, along with the related longer-term forecasting, scenario planning, and importantly, implementation of enduring solutions.

Many Boards and finance functions simply do not have the bandwidth for all this critical work and need a trusted advisory partner experienced in implementation to support analysis, planning and delivery.

Avoiding the doom spiral

It is too often the case that businesses note a trend of worsening profitability over a few months, then reforecast, building in improvements back to previous profitability levels. These may not materialise, because of over-optimism or the changes required for success have not been implemented. Management then sometimes looks for short-term cost reductions to save cash, as working capital pressure builds, by cost cutting or reducing headcount.

If this does not result in the required outcome, lender pressure and subsequent insolvency practitioner involvement often becomes necessary. We can help break this common doom spiral, supporting early, when stress signs start to show, and ensuring plans are implemented fully and successfully.

Do get in touch to discuss how we can help your business. With years of industry experience in stressed and turnaround situations with debt, working capital and profitability issues, we’ll certainly be able to help, whether you need light touch or more involved support.

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.