Help for small businesses needs to be scaled up to prevent collapses as they face cashflow crisis

Businesses across the UK face significant challenges with cashflow, as they struggle to weather the Covid-19 lockdown. British Chambers of Commerce (BCC) polling of more than 1,000 businesses, conducted at the beginning of April, shows that two thirds of UK firms say they will run out of cash within the next three months. One in 10 firms say they have already run out of cash. And today the ONS published numbers showing that 15 per cent of firms say they are not confident they can continue to operate through the crisis. As many as 30 per cent of firms in hospitality said they might not make it.

The government has put in place measures to address tightening liquidity, including the business interruption loan scheme, and the employee retention scheme. However, the British Chambers of Commerce (BCC) evidence suggests that this support is not reaching businesses fast enough. The survey reports that just one per cent of businesses say they have successfully accessed the government’s business loan scheme, or the grants for small businesses. Most concerning, one in five firms say they are quickly running out of cash (see figure 1). Businesses cite the complexity of the application process and slow response times as reasons for not accessing the loans.

Figure 1: One in five firms say they are quickly running out of cash

In this briefing, IPPR and the London Progression Collaboration – a project helping more than 1,000 Londoners into high quality apprenticeships – argue that the government urgently needs to do more to help businesses overcome this cashflow crisis. It needs to:

• ensure commercial banks scale up resources devoted to getting the loans to businesses

• work to simplify the loan application process further

• establish clearer and more consistent communication with businesses of all sizes, through designated points of contact

• extend the grant scheme to firms affected by a second wave of closures.

What businesses are at risk of failing?

While the Covid-19 lockdown initially impacted consumer sales, particularly in retail and hospitality, the measures are now hitting a range of other firms hard.

• Small construction businesses are suffering. Through the London Progression Collaboration (LPC), we have spoken in detail to c.20 London firms over the past two weeks. Our anecdotal evidence has revealed that supply chain businesses have seen demand dry up. This comes as a double-blow, as companies struggle with a period of sluggish trading as a result of Brexit uncertainty. As many businesses enter the new financial year with limited orders, many are struggling to access government loans. Construction sector firms do not qualify for grants because they are not in the sectors outlined by the government. Many of these employers are choosing to make at least some redundancies, as they simply don’t have the cash reserves to fund wage bills until the end of April.

• For larger construction firms the picture is mixed. Most businesses are making sweeping changes, with significant restructuring and large voluntary furlough schemes. Many larger firms remain buoyant, with Government funding for projects like HS2 providing some certainty. However, others have entered the lockdown in financial peril. This should be a cause for concern for supply chain businesses. As one industry insider put it to us: “If you want to find a canary in the coal mine, take a look at the payment terms of the bigger contractors. Just before Carillion went bust, they increased their payment terms from 30 to 60 to 90 days and so on.”

Figure 2: Firms in a wide range of sectors are under financial strain

• As highlighted in the ONS data today (chart above), other affected industries beyond hospitality, retail and entertainment are administrative and support services and manufacturing. One in five (20 per cent) administrative and support services businesses and one in seven (14 per cent) manufacturing businesses say they are ‘not confident’ that they would be able to continue operating through the crisis.

Why are existing schemes for businesses not working?

Our conversations with London businesses suggest that large and small firms are running out of cash very fast. There seem to be several reasons for this.

1. There were design flaws in the scheme aimed at supporting small businesses, making it too difficult for many firms to apply. The original scheme also left out medium sized firms. These have now been addressed. But other problems remain.

2. Many commercial banks – through which the loans are channelled – are still not pulling their weight. Our anecdotal evidence and reports suggest some banks still being slow in processing applications. They appear to be slow in committing internal resources, leaving long waiting times.

3. The scheme is still more complex than those in other countries (eg Switzerland).

4. Many firms are confused about whether programs apply to them.

5. Much of the support schemes – including furlough ones – only kick in when firms already have had to lay off workers or, worse, have already gone bust.

6. The small business grant scheme has been designed only for sectors affected by the ‘first wave’ of business interruption, only covering retail, hospitality and leisure. The second wave of disruption is now hitting a wider range of businesses, including the construction sector.

What can the government do to prevent a wave of bankruptcies among small businesses?

• The Bank of England, via its bank supervisors, needs to ensure commercial banks scale up resources committed to approving loans quickly. They should check in with them on a daily basis to ensure capacity is ramped up.

• The loan application scheme needs to be further simplified. The loans should be requestable through a 1-page form and funding should be arrive at firms within 24 hours. Speed is of the essence.

• The government needs to continue to provide clear and consistent advice and guidance to employers on the support that they can access. It needs to work closely in conjunction with businesses associations in getting consistent information to as many businesses as possible. The government should work hard to maintain regular updates, while tackling misinformation and rumours robustly. To ensure consistent messaging, the government should work with industry bodies to appoint sector leads, either through individual organisations or a consortium of industry representatives. The government should lean on these industry bodies to communicate on their behalf. For example, in construction Build UK is taking a lead on behalf of the construction sector alongside the Construction Leadership Council. The Government should note that these industry bodies are often short on resources and face their own cashflow pressures. This can make it difficult for them to communicate with large numbers of smaller employers.

• The grant scheme should be expanded to small businesses clearly affected by the second wave of closures, including the construction sector. This action should be taken within two weeks, to avoid businesses taking drastic measures to shed liabilities as the cashflow crisis bites.

In sum, while the government has made important steps to help small businesses to get through this crisis, these funds are not reaching them fast enough. It is not too late to save these firms, if steps are taken over the next days to scale up the scheme. Banks need to do more, processes simplified, guidance need to be clearer and more targeted and small business grants need to be extended.

Carsten Jung is an IPPR senior economist.

Oscar Watkins is a senior account manager for the London Progression Collaboration.