10 ways to finance your business and survive lockdown

Pro "It's a cheap form of finance with a relaxed form of repayment," says Andy Foster, senior adviser at Sandton Capital Partners.

Con "The problem is, it needs payback," says Andrew Ley, partner, corporate at Addleshaw Goddard. And there is danger of what might happen if you can't: "If you can't repay that government funding, you might find they want to swap debt for equity," explains Foster. "And you might find that you get the worst of both worlds: you get a debt provider asking for equity."

2 Buybacks, redemption and reduction of capital

In a nutshell Companies deemed to be an Undertaking in Difficulty (that have accumulated losses greater than half of their subscribed share capital or capital) aren't eligible for government-backed loans. This is a means for them to circumvent that classification.

Who's it for Companies deemed an Undertaking in Difficulty looking to access government-backed loans. "It's purely an accounting thing," says Ley. "It doesn't have any impact on the shares in issue or the cash or the business. It just changes your accounts, which allows you to then eliminate losses, which takes you out of being an Undertaking in Difficulty."

Pro "It's amazing the number of calls we've had with people over the past nine months where we've had that conversation and they've said that's the most valuable piece of advice I've had all year," says Ley.

Con "This is a relatively easy thing to do. So I don't see there being many reasons not to do it," says Ley.

This is a relatively easy thing to do. So I don't see there being many reasons not to do it

3 Equity fundraises

In a nutshell Equity fundraises allow companies to raise additional capital by issuing new shares in return for an increased equity stake in their business.

Who's it for "From PLCs using the stock markets down to private companies," says Alex Dumphy, partner, corporate lending and borrowing at Addleshaw Goddard. "Small- and medium-sized enterprises, for example, might be looking more at the crowdfunding market."

Pro Has the benefit of bringing new cash into the business.

Con "You're likely to get crammed down by quite a lot," says Robert Connold, director in debt and capital advisory at Deloitte. "If the enterprise value of a business was £200m pre-Covid, you can argue that it should still be £200m today, based on earnings that will be coming in the future. But you will likely receive offers with a significant discount."

4 Debt for equity swaps

In a nutshell Swapping debt for equity with your lender. "Lots of leisure businesses have used debt to fund rollouts," explains Dumphy. "When a business is struggling under the burden of that debt, you can speak to your lender and swap the debt for equity."

Who's it for Not just for large chains funded by private equity. "It could be a solution for smaller chains," says Dumphy. "If you remove some of your debt costs, you put it onto a better footing to survive."

Pro Save interest costs, but also stave off the threat of administration. "It removes the Damocles sword of the lender being able to take the business off you. It's a step before administration or liquidation – convincing your lender that actually there's a long-term future in the business, so why not become a shareholder and swap the debt out?"

Con Most banks won't want to take debt for equity. "If you're trying to do a debt for equity for £100,000, that's going to be really tough," says Foster. "It's going to be very labour- intensive, it's going to take about the same amount of work as getting £1m or £10m in. So the only way you could probably do that is to get a private investor."

5 Corporate simplification

In a nutshell When groups are made up of lots of different companies, they can simplify and bring them together in one company.

Who's it for Not just large, complex groups. For example, it would be applicable for pub groups where each individual pub is a separate company.

Pro Save costs and ring-fence risk. "If there are bits of the business that are more at risk than others, then you can use the reorganisation as a way of addressing that risk," says Ley.

Con Cost and distraction. "You have to ask, is it worth it for you at this point?" says Ley.

6 Divestment

In a nutshell The sale of company assets.

Who's it for Any company that has assets and wants to generate cash. "Look at what your assets are and look at which ones you can do without," says Dumphy.

Pro Businesses need cash to survive. "Liquidity, liquidity, liquidity," says Dumphy. "The more cash you have, the more likely you are to be able to keep the shutters down until they come up."

Con "When you've sold it, you've sold it. And you won't necessarily get top dollar for it now," says Dumphy. Also worth considering are the knock-on effects: "If you go from, say, three to two hotels, you need to ask how that will affect your buying power and your lifestyle, as it will be taking away a significant portion of your income," says Jordan Kay, investment manager at Sandton Capital Partners.

If you go from, say, three to two hotels, you need to ask how that will affect your buying power and your lifestyle, as it will be taking away a significant portion of your income

7 Diversification

In a nutshell Moving into new markets or products in an attempt to generate new sources of revenue and increase cash on the balance sheet.

Who's it for Any size business. The pandemic has seen restaurants diversify into food boxes and brewers switch from on-trade to direct-to-consumer. Both are areas that will likely continue once the pandemic eases.

Pro Bringing in money at a time when the business would otherwise be closed. "It also keeps your staff engaged, it keeps your name in the market and it keeps you in touch with your customers," says Dumphy.

Con It is not a route to riches. "There's no way that for a large, or even medium chain, that it's going to cover your costs," says Dumphy.

8 Bringing intangible assets onto the balance sheet

In a nutshell Using the hidden value of your intellectual property (in particular, self-generated IP). "Moving your brand out into a separate company can be helpful," says Ley. "And in doing it, you generate a market value for your brand that then appears on your balance sheet."

Who's it for Any business with brand recognition.

Pro Improve the balance sheet and ring-fence risk. "If you've got valuable IP, but it's locked into the trading business, it's exposed to trading risk. This is about moving it out before any of that risk actually hits," says Ley.

Con Entry costs can be high – and only worth it if the IP is valuable enough. "One of the IP companies that we've been working with on these kind of projects will probably charge you £20,000 to do everything from IP valuation through to spinning it out into a new company," says Ley. "But if you've got IP that's worth £100,000 plus, that can be really helpful."

9 Replace investor-sourced financing with mainstream bank debt

In a nutshell Taking advantage of historically low interest rates by switching from investor funding to high street-bank funding.

Who's it for Anyone with expensive debt.

Pro Reduces interest payments on your debt.

Con "The appetite is depressed from that market," says Connold. "High street lenders are focused on their existing portfolios at the moment. Commercial lenders have been supportive and active with their existing clients, but where there's new opportunities with new clients, the bar is much, much higher for them to deploy their capital."

10 Sale and leaseback of assets

In a nutshell A sale and leaseback is an arrangement in which a company sells assets or real estate to a funder, who then leases those assets back to the company.

Who's it for Anyone with real estate or plant/machinery equipment.

Pro It releases cash. "Weighing it up, is it better than bringing in equity and losing control of the business or bringing in debt to the business?" says Dumphy.

Con "Once it's sold, it's sold," says Dumphy. "It's a strategic change."

Divestment: Beales Hotel Group

At the start of 2020, Beales Hotels was a healthy hotel group, an eighth-generation family business operating two profitable sites in Hertfordshire – West Lodge Park in Hadley Wood and Beales hotel in Hatfield.

The latter had been in the group since 1964, and was rebuilt as a four-star hotel in 2004 at a cost of £5.5m, £4.5m of which was borrowed.

By 5 July 2020, after 15 weeks of lockdown, the hotel had borrowed a further £400,000 just to stay alive. "That made a total of £4.9m of debt, which cost us £150,000 a year in capital repayment and £150,000 a year in interest to service. Or, to put it another way, nearly £1,000 a day," explains managing director Andrew Beale.

Considering the cost of the debt and the site's heavy reliance on the conference and corporate markets – which showed no sign of returning despite the easing of Covid restrictions on 5 July – Beale and the board made the difficult decision to divest the property, although not through the usual channels.

"If we had listed it for sale as a business, we'd have been lucky to have received £3m for it," says Beale. "Instead, we listed it through a commercial property agent and ended up receiving six bids from property developers, accepting a final bid of £5.7m."

Beale admits the sale was a bittersweet moment. "If you are a large hotel chain and you divest a property, you probably don't really notice. But when you are group of two hotels, it is a really big deal."

The group lost the property's annual £250,000 profits, but the personal side of the sale was even harder to take. "We had to make 40 staff redundant, which for a family business as old as we are is horrendous."

Beale also admits it will be hard for the group to ever buy a hotel of similar size and quality. "It was a very difficult decision, but – considering the drop-off in corporate and conference trade – I don't regret it."

Diversification: Red's True Barbecue

Like many restaurants, five-strong chain Red's True Barbecue has launched food boxes during lockdown. While the boxes have allowed the group to stay in communication with customers, says co-founder James Douglas, it is its retail diversification that has kept the lights on during Covid. Launched in 2012 by Douglas and Scott Munro, the duo had nothing in mind except launching a restaurant. But their first site, in Leeds, happened to be near Asda's headquarters. Very early on they were approached to launch a retail range of barbecued meats and sauces.

"I said: ‘We've been in the restaurant business for six months. I don't know how to run the restaurant, so I wouldn't know how to deliver a retail-ready range of food," says Douglas. But the conversation didn't end there. Asda introduced Red's to company All About Food, which manages the retail side of brands such as PizzaExpress and Nando's. It was the start of a journey that saw the two companies work on a sauce and barbecue rub range that launched in Asda in 2015.

The range was a success, outselling a rival range from Hellmann's, and continued to develop in the background. "It didn't take up a lot of time, but it added up to retail sales of about £3.5m a year. We became the biggest independent barbecue sauce brand in the UK."

The retail range continues to grow, and has incorporated everything from jerky to ribs, burgers and sausages – all of which was bolstered by strong summer sales through lockdown.

While Douglas stresses that they only see a small cut of the total sales, it has undoubtedly eased the impact of lockdown. "It's fundamentally allowed us to keep the lights on for the business. It's strange, that this little side-hustle has sort of almost become our primary business."

Managing debt's impact on mental health

For owner-operators, the stress of the last year is bound to have spilled over into their personal lives.

"More than half of the self-employed people we recently surveyed said that financial worries caused by Covid-19 had a negative impact on their wellbeing and mental health," says Jane Tully, director of external affairs at the Money Advice Trust, the charity that runs Business Debtline.

"With four in 10 expecting it to take more than a year for their business income to recover, financial worries caused by the outbreak will be with many small business owners for some time." What is crucial is recognising when those worries become something more serious, says Nikki Bond, senior researcher at Money and Mental Health: "If you find that things you used to be able to manage with ease are now becoming overwhelming, or if you're finding it difficult to enjoy things that you've previously got joy out of, or you are withdrawing from social life, it could be a sign that some sort of intervention is in order," she says.

If that is the case, the first port of call is to access online resources, say both Bond and Tully: mental health charity Mind and the NHS offer invaluable online support, while Business Debtline advisers provide free, impartial advice. There could even be practical solutions open to the small business holder: "If you are experiencing a mental health issue and are finding it hard to deal with your debts, you may want to tell your creditors about your situation," says Tully.

"They may be able to make adjustments based on your circumstances, including allowing you extra time to gather information, pausing debt collection activity, payment deferrals and agreeing to contact you at set times only."

Alongside expert advice, we all have a role to play, says Bond: "We're all up against such extreme circumstances at the moment, and being there and listening to people is vital. It's about reaching out to your colleague or boss so they have the chance to say: ‘Yeah, I'm struggling a bit at the moment' and then steering them towards help."