How businesses are being affected by COVID-19 shutdown

The Covid-19 shutdown has had a huge and varied effect on the health of Irish SME’s.  The sudden nature of the shutdown has been particularly difficult for many companies to deal with.  These businesses are not rarefied entities with endless resources, rather small companies on which many families and individuals rely.  It’s said that businesses can cope with most things bar uncertainty and these are very uncertain times.

Many businesses ar,e in a holding position,  waiting to see what happens in relation to Government supports for workers and when their business can finally resume normal operations.

Roughly speaking companies can be divided into three categories

• Companies  that are still working through the lockdown,
• Companies that have stopped on a temporary or partial basis and
• Companies that have stopped and will most likely not reopen when the lockdown is finally lifted.

The key for policy makers is to ensure that as many as possible of the second category are assisted in their return to trading, possibly under some stringent restrictions.

There are a whole host of difficult issues that will immediately face companies once business resumes.  Firstly prior to opening, companies will have to foot the bill for preparing their trading and office areas with PPE that complies with Government regulations.  This will be crucial for customer-facing businesses which necessitate face-to-face contact with their customers.  Retail and the Hospitality sector will face restrictions on space, for example, the number of customers allowed at any one time on their premises.

Staffing will present another major hurdle for returning companies as it is one of the largest variable cost of most companies.  The costs of funding redundancies may be crippling for some businesses, particularly those businesses that have had long-term employees that they cannot afford to keep on.  These companies will be hit very hard in terms of redundancies and minimum notice payments.  Staff retention of key employees may also be an issue for certain sectors after such a long break in normal trading.

Another crucial area will relate to a company’s premises.  Will landlords offer or be induced to offer either rent free or reduced rents to assist in businesses recovery?  The Rating authorities can play a significant role in this regard, particularly in relation to the longer term.  Currently all business will be granted a waiver of commercial rates for the six months until September 2020.  It remains to be seen if this period will be extended.  Businesses are also waiting to see in Covid support will be extended and for how long.

Domino effect

One of the defining features of the last recession was the “domino effect” of company failures, particularly in the property and construction sectors.  Companies generally pay their invoices when they can afford to, but the last recession was characterised by a domino effect on interdependent companies. For example, a single development company failure could lead to the failure of number of direct subcontractors and have a damaging effect on builders merchants, architects, quantity surveyors and other professionals and suppliers.

Credit Control

Credit control will be key to the success of many businesses.  It can be difficult to chase invoices at the moment, particularly when you know that the client is in a complete shut down as their cash flow will obviously be severely hindered.  For many companies, efficient managing of their debtor list will be a make or break factor in their survival.  Debtors lists tend to be harder to collect the longer they are outstanding and this will inevitably lead to problems for companies that invoice on a credit basis.

Another key factor will be how banks and financial institutions treat their borrowers throughout the recovery from lockdown.  Many companies are now on payment breaks but these will have to end at some stage, and, if the banks aren’t sensitive to the needs of SME’s they may imperil many companies struggling with their cash flow.  Payment breaks are not loan forgiveness and any loans will still have to be repaid in full.

Similarly, the Revenue Commissioners currently have a system of “Tax Warehousing” in place which allows companies to put off payments for a certain period of time to assist with cashflow and thus aid their survival.  The Revenue Commissioners will have difficult decisions to make when it comes time to end this system and will have to ensure that it is not done too quickly, otherwise it could contribute to the failure of many businesses.  The tax warehousing system only allows for the postponement of paying taxes and does nor provide for a remission.

In summary, it is hoped that with the right supports from Government, Landlords, Revenue Commissioners and Banks that we as a country can maximise the number of companies that will be able to resume successful trading once the pandemic restrictions have been substantially lifted. It is essential that there is coordinated policy response from these key players to save “saveable” businesses.  The financial well-being of so many businesses and thus the livelihoods families and individuals will depend on this.

By Michael Kennedy

Michael Kennedy is a Partner with Irish Insolvency, 32 Fitzwilliam Place, Dublin 2

www.iis.ie

michael@iis.ie