Business is an intellectual game not an emotional one, and that doesn’t change in times of crisis. Before applying for a government backed loan, to increase your chances of success you must think like an investor. This means assessing your business objectively, is it still a good business? Do you really need a loan? And, finally, what would an investor think of your proposition?
The latest reports that just 1.4% of businesses who have applied for the Coronavirus Business Interruption Loan scheme (CBILS) have been successful is not surprising to me, as an investor. For the bank, only 80% is guaranteed which poses some considerable risk, especially as now it has been announced that banks are banned from asking the business owner to personally guarantee the other 20%. So, how should businesses prepare?
For business owners
A loan, no matter if it’s 80% government backed or not, is still a loan, and the repayments have to make sense to you. As well, your business has to be attractive to the lender. Is your business viable? How will your metrics change in the next few months when social distancing measures continue in-force? Any business owner should be asking themselves this question, “If you were an independent investor, what return would you want from your money or time, and can your business provide this?”
Make sure you have a clear proposition, don’t just assume you will get the money as it’s government backed. The banks need to assess each company on a case by case basis.
The questions I would be asking myself are, how will I have to reinvent my business? What changes will I have to make? For example if you have a restaurant, how will social distancing affect you in future? Will you be taking less covers? Will you have to go for a more upmarket positioning and charge more per cover to mitigate this impact? You know how many people you need through the door to make a profit usually so how can you still succeed with social distancing?
“The real damage may be yet to come, when businesses start to open up again but in a new environment, with social distancing measures likely to continue for some time”.
Assessing risk – the lender’s perspective
The obvious question to ask about the CBILS scheme is why are so few businesses being accepted?
Firstly, banks are being inundated with requests and have not had the chance to resource up for this, so there will inevitably by a backlog. Any business, no matter how big, when faced with overwhelming volume is bound to slow down. Secondly, banks are no longer following their usual underwriting risk assessment criteria. Now it appears the rules have changed and banks have been banned from asking for personal guarantees from small businesses seeking help, so it is not even clear who takes on the risk for the remaining 20%. This situation could mean the part of the loan not backed up by The Government is not secured, and therefore it becomes a bigger risk for banks. If there are no personal guarantees then surely the banks are going to choose companies who have more chance of success.
As an investor myself I can see why lenders would not want to provide loans to companies who were not solid before the crisis, so you really need to do your homework, do your own planning and asses whether you have a viable proposition for the lender.
What should business owners do? Should you take a loan at all?
Each business is unique but now is the time to take stock and really assess where the business will be in the short, medium and long term. Take advantage of grants, furloughing schemes and plan carefully for the return to business post Corona. With emotions running high during the Covid19 pandemic, it’s easy to let the heart rule the head. Now is the time to be objective. It’s absolutely worth getting a grant or furloughing your staff so they can be paid, whereas a loan is something you have to consider carefully. A loan is still a loan, with repayment terms, even if it’s 80% government backed. How will you repay it? Are you sure this is the best option for you and if your business is strong enough to support it?
Applying for a loan
If you do decide to go ahead and apply for the loan, make sure your application is a well researched one. To increase your chances of getting the loan you need to have done your homework and planned for the medium and long term impact of coronavirus social distancing rules, and show how you are mitigating the risks. Remember your loan needs to be considered carefully and still poses some risk for the bank, so having a solid plan is the only way you will be accepted. It also means there is more chance for you to succeed, during and after the coronavirus pandemic. Businesses evolve, and those that will do well are those who can move with the challenges of the market at any time.