Here, Simon Renshaw, senior insolvency practitioner at Company Debt, highlights what financial implications UK SMEs will have to face amid the coronavirus pandemic
The UK is still in the relatively early stages of the COVID-19 pandemic, but already the virus has had a colossal impact on British businesses of every size. The outbreak has caused unprecedented disruption to supply chains, forced the closure of many businesses and pushed the financial markets to breaking point. With such widespread devastation, it’s little wonder that small and medium-sized businesses in every industry and location are suffering.
Anxiety among the public and government-imposed restrictions are causing bookings and income to fall, while supply chain squeezes are making it impossible for many businesses to function properly. It’s feared that the result could be an economic crash on the scale of 2008, but this time it’s the UK’s 5.9 million small businesses that need to be bailed out rather than the banks.
Social distancing, which is the requirement to stay more than two metres from other individuals at all times, is hammering the income of many businesses. Personal service businesses such as hair and nail salons, and home-based services such as plumbers, electricians and housekeepers, are all feeling the pinch, with many being left with little choice but to close.
There are also the millions of businesses that have already been forced to close as part of the government’s response to the virus. Although pubs, restaurants, gyms, theatres and other businesses were initially allowed to remain open, the requirement for social distancing has made their eventual closure inevitable. That has left a huge number of businesses with no cash coming in but with fixed costs that still need to be paid.
Shrinking access to credit
While the government’s rescue package will provide some relief for many small businesses, operators that rely heavily on borrowing to fund their operations will find it harder to tap into credit as the outbreak curtails economic activity.
If UK SMEs are unable to access credit to meet their rent, make payroll and pay their suppliers, they could be left with little choice but to undergo a severe cost-cutting exercise. That may include making employees redundant, reducing their output, pausing investments, seeking debt repayment breaks and entering into formal insolvency procedures. Although measures have been taken to keep credit flow through the economy and prevent a wave of business failures, the situation will still be untenable for many SMEs.
Supply chains are faltering
To continue trading, SMEs have to keep their shelves stocked and raw materials coming in. However, unlike their bigger rivals, they do not have the large and long-established supply chains they can tap into to restock quickly. Even some of the UK’s largest business, such as Jaguar Land Rover, have had to halt their operations due to supply chain failures, and that’s extremely ominous for many smaller firms.
Tens of thousands of manufacturing firms in Europe, the US and China have temporarily shut assembly lines or even closed manufacturing plants permanently, and that’s having an inevitable impact on British firms. In China, where the number of coronavirus cases is now falling, the activity of manufacturing plants is still expected to be suppressed for months. Supply lead times will also cause problems for many businesses, with global transportation affected by the outbreak and shipping from China to the UK already taking an average of 30 days.
While large businesses may be able to pay frontline workers while they weather the pandemic, many smaller businesses cannot afford to do so, particularly when cash flow has ground to a halt. In a move to reduce the number of layoffs and the costs of struggling businesses, the government has pledged to pay 80% of salaries for staff who are kept on by their employer, up to a maximum of £2,500 a month. The wage subsidy will apply to businesses that have already had to lay off workers due to the coronavirus, as long as they are brought back into the workforce immediately and granted a leave of absence instead.
Although the package has been welcomed by employers, there are still concerns that the delay in the first support payments being made will cause significant damage. Many businesses will face rental payments before the support is due to arrive and that could force many small firms into a potentially terminal cash flow position. Many SMEs will also face the additional costs associated with replacing laid-off workers when normal service resumes.
Protecting the lifeblood of the British economy
Many small businesses across the country face insolvency as coronavirus fears put the brakes on the economy. Social distancing measures, enforced closures and cancellations are already taking their toll, with many more difficult times ahead as supply chains falter and footfall continues to drop. Given this increasingly bleak backdrop, SMEs are relying on the government to put the necessary lifelines to place to save the small business economy.
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