Given the recent decline in financial performance, the business is now in breach of its covenants with the bank. Should we be concerned?
That will depend on the terms of your facility and the stance taken by your bank.
Banking facilities often place obligations on businesses to stick to certain financial criteria. For example, an obligation to keep turnover or profit above certain levels or a commitment to keep the bank’s exposure within an agreed percentage of the value of the company’s assets (known as loan to value ratio).
The consequences of breaching those covenants will depend on the terms of your facility, but normally this amounts to an event of default. Events of default can result in the loan (or whatever form the facility takes) becoming repayable and could give the bank certain powers to take action to recover the money that they are owed.
Whether the bank will take action during these unprecedented times is another matter, particularly given the extent of support being offered to businesses via mainstream lenders and the political desire to keep viable businesses up and running. Lenders themselves will no doubt wish to remain supportive where possible. The underlying performance of the business (and whether but for the effects of Covid-19 it would have been in a healthy financial position), the relationship you have with the bank and your history with them will no doubt be relevant to the approach taken by the bank. However, early engagement with your bank (as well as other key stakeholders in the business) will be important.
Related FAQs
The Coronavirus Business Interruption Loan Scheme (“CBILS“) is open for applications to provide small businesses with a loan of up to £5m to assist with the Covid-19 outbreak. The Scheme is aimed at businesses who are experiencing lost or deferred revenues, and who otherwise would be denied support from lenders, to be supported by a Government backed guarantee. The Scheme will initially run for six months with the possibility to be extended where required, so businesses should only approach a lender under the Scheme as and when they require assistance.
The Thriving at Work Report and the recent NICE Workplace Mental Health Guidelines provide a good baseline for what all organisations should be doing on workplace mental health – this includes some guidance on training. There does need to be a plan in place and we recommend taking a holistic view of the integration of mental health first aiders into a business – ie it should be one component in a strategy that also comprises training for line managers, awareness training and education for all staff, peer support, and a documented framework for support and signposting. It is also worth ensuring you have senior manager sponsorship, strong links with Occupational Health if available and also raising awareness via any works councils or employee forums helps ensure there is buy in at all levels.
We hope that all organisations will come out of lockdown successfully. However, the current economic crisis means that many organisations will face very difficult trading conditions.
Employment costs are one of, if not the, largest cost to your organisation. These costs will have an effect on your financial well-being – and many organisations are now considering how to reduce employment costs. That said, your workforce is also your most important asset and as we get back to business, you will need your workforce to run the organisation, produce your goods, deliver your services and deal with your customers.
As a result, many organisations are facing a very difficult situation – how to reduce or flex the cost of the workforce whilst also maintaining an ability to service customers. This difficulty is enhanced by the uncertainty of when the pandemic will be controlled and the threat of lockdowns end.
Court hearings have been conducted remotely, with the judgment in Kerry v SSCLG being given via telephone. The Senior President of Tribunals issued emergency Practice Directions which will apply to Property and Lands Chambers’ respectively. This has made provision for remote hearings. Inspections of properties have been suspended with immediate effect, with photographs, videos or external visits permitted where appropriate. Where inspections are essential, the case should be stayed.