Many businesses in vulnerable sectors may have slipped into a loss making position following lock-down. Some of those businesses may have availed themselves of government backed “soft” loans to provide them with the cash-flow to survive the process.

Even with rigorous planning to reduce costs, furlough employees and benefit from other COVID related grants, businesses that cannot re-establish income streams (sales) will inevitably face the likelihood that outgoings are more than incomings.

The resulting losses will gradually eat away at cash resources – usually funds created and retained from pre-COVID trading activity – and loans may be the only way that affected businesses can hope to ride out the present coronavirus disruption.

Loans, of course, need to be repaid. Even the government guaranteed loans will need to be repaid.

If you find yourself in this position, then being vigilant – and in particular, reviewing monthly accounts – need to move closer to the top of your to-do list.

Companies that rely on loans from third-parties to provide working capital, when they have much reduced turnover, should spotlight their balance sheet. When total liabilities – including loans – are more than total assets the company may be insolvent. If you are consulting with your advisers on a regular basis this will come as no surprise, if you are not in the habit of seeking support from your accountant then pick up the phone.

Self-employed traders with no limitation to their personal liability are in a more difficult position as any potential business insolvency may give creditors recourse to claim against their personal assets including their home. Note, that this recourse – to use a self-employed trader’s home as security – should not apply to certain government backed loans.

A further complication is taxation. Many of the grants received to support all manner of businesses during the pandemic are treated as taxable income. If the grants are subsequently used to defray allowable business costs then no tax should be payable. However, as part of your monthly review it is worth asking your tax adviser to factor in tax considerations.

Clearly, the resumption of normal trading conditions is of prime importance to all businesses. Without a healthy income, businesses will eventually run out of resources and will be forced to close.

The key is to stay vigilant; keep yourself informed. If you are concerned that you need to act based on the contents of this post please get in touch. We can help.

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