Wake-up call: It’s time to face up to Covid debt repayment

Companies are repaying thousands of pounds a month, but there are avenues to smooth the path to being debt-free, says Dominic Dumville

The problem

With the hospitality industry experiencing a quieter than usual time with the cost of living crisis, operators may be feeling anxious about their ongoing repayments of Covid borrowing. UKHospitality has called it a “ticking timebomb” and has called on greater support from government. But if that support fails to materialise, what should hospitality businesses do when cash is tight?

Hospitality businesses were among the worst hit by the lockdown, with many taking advantage of the generous government Covid support schemes. Those support schemes now need to be paid back at a time when the economy is stuttering, and spending power of the average household is being squeezed.

The monthly instalment on a £50,000 bounce back loan is likely to be around £1,000 if repaying over six years, which can be reduced to less than £600 if the repayment term has been extended to 10 years.

A greater difficulty is likely to arise on larger CBIL loans, with lenders advancing up to £5m in overdrafts, asset finance and term loans, repaid over a period of up to six years. If a business borrowed £500,000 at an interest rate of 4%, the average for the time, repayments over a six-year period will be nearly £8,000 per month.

So what can be done? Without a doubt, sticking your head in the sand and hoping for the best is the worst thing a director facing uncertainty can do. In fact, directors have a legal duty under the Companies Act to do more than that and ignoring a problem cannot possibly be in the company’s best interests.

Expert advice

If the problem is a short-term cashflow, you might find a way through by speaking with stakeholders. Is there a key supplier who might agree to extending a credit limit? Can you agree a capital repayment holiday on your lending for a few months?

If the problem is more than a short-term cashflow difficulty, directors could explore re-profiling the repayment terms on any borrowing. The repayments, for example, on a £500,000 debt can be reduced from £8,000 to £5,050 per month if the term is increased from six years to 10.

If these solutions aren’t suitable, there are other solutions that require a degree of planning and may include more formal restructuring. For any of these to work, a key component is a sound underlying business.

One answer may be a debt-to-equity swap, where a lender, recognising there is value in a business over an extended term but that it cannot afford the current repayment obligations, takes an equity stake in a business. Alternatively, a Creditors Voluntary Agreement may be an option, formally restructuring the company’s unsecured debts, where creditors vote on a proposal which typically involves compromising elements of their debt in preference of an alternative much worse outcome (usually liquidation).

Checklist

Above all, a director of a company facing cashflow difficulty needs to act quickly, pay close attention and formulate a plan for how the business will get through.

• Have you got a cashflow forecast?
• Have all non-essential costs been cut?
• Will lenders grant a repayment holiday?
• Can repayment terms be extended?
• Do you have the expertise to assess your finances and negotiate improved terms?
• Have you considered your directors’ duties?

Beware

In circumstances where things go from bad to worse and the company ends up in an insolvency process, the directors’ conduct will be looked at. Where external forces cause a business to fail, like a lockdown, the directors are not to blame, but their actions in response to the trouble are subject to review. They can, in some circumstances, be held accountable for not preventing the position from worsening.

Dominic Dumville is a partner in the restructuring team at accountants Mercer & Hole

www.mercerhole.co.uk