Loan schemes offer huge influxes of cash but what is the best way to use it?

The Coronavirus Business Interruption Loan Scheme and the newly introduced Bounce Back Loan Scheme are now thought to have provided over £10billion worth of loans to the UK’s small businesses.

The Bounce Back Loan Scheme especially has had a tremendous impact, with over £5billion of funding approved in the first three days. For many businesses this will be one of the most significant influxes of cash in the lifetime of the business, and many founders may be wondering what the best use of these funds is.

Reece Tomlinson, CEO of RWT Growth, a corporate advisory firm for global SMEs, offers the following advice for SMEs:

This is a truly unprecedented time in a myriad of ways, not least in the sense that many business leaders have, in the last week or so, received substantial loans to help them survive this period. But with no experience handling this, the cash can present challenges itself. Here is my advice for dealing with it:

1. Managing cash flow is paramount. Every effort needs to be made to ensure the SME is not burning unsustainable levels of cash, which could otherwise cause the SME to be forced to close its doors. Receiving support in the form of this loan should not change the need to improve the firm’s cash flow.

2. Hold on to as much as possible. It may be tempting to pay off as many debts and obligations as possible but it is important to prioritise what will keep the business running. Some tax bills have been given deferrals – such as VAT – be careful that you are not spending this capital on bills that can be paid at a later date if at all possible.

3. Change your mindset. For many businesses, this will be the first time they have been exposed to significant levels of debt. It is crucial to shift your way of thinking away from ‘all debt is bad’ to one that sees it as good debt, bad debt and unsustainable debt.

4. It will need to be paid back. This is important because the business will need to, at some point in time, be able to start making payments from the cash flows of the company. For example, if the SME borrows £250,000 via the CBILS, you can expect your future cash flows to be no less than £50,000 lower per year for a minimum of five years (assuming no interest or lender-levied charges). Businesses should conduct an affordability test and financial model before applying to understand the viability of the debt taken on in a best and worst case scenario.