For many businesses up and down the UK, the impact of the coronavirus pandemic represents the biggest challenge they have ever faced. If you’re leading a startup, then the implications of the pandemic can be even more daunting, as your organisation may not yet be turning a profit. Here are a few thoughts about how startup businesses can navigate the uncertainty created by coronavirus.
1. Know how much money you need to keep going
As a startup, you need to know your 'burn rate' – how much cash are you spending each month, how much of that goes towards fixed costs, and how much goes towards variable costs.
Knowing your burn rate is even more important than ever. It’s no longer 'business as usual' for the majority of the economy, thanks to social isolation measures having an immediate impact on many industries and fundamental changes in consumer behaviour.
Unfortunately, this may mean your previous assumptions about the sales cycle, customers, and revenue are no longer true, and so your burn rate may be different now to what it was before the crisis. Using your burn rate, you can calculate the amount of time you have until your company’s funds run out. This is important for the next step.
2. Determine how long your business may be affected
As mentioned, the pandemic has had a dramatic impact across the economy, but it does vary by industry. Industries such as hospitality, travel, sports, and others may see a long-term negative impact, due to limits on social gatherings.
Meanwhile, other industries such as ecommerce are booming or struggling to meet demand, thanks to changing customer needs in light of the social distancing measures.
For some businesses, coronavirus may be a temporary blip, in which case an immediate but temporary freeze on variable costs may be a suitable course of action to preserve funds and extend the length of time you have before funds run out.
Unfortunately, in other industries the impact may be much more long-term, and so more drastic measures may be needed to cut burn rate and extend your funds. This could include negotiating fixed expenses such as rent or lease payments, and substantially cutting variable spend.
Consider where your business stands and how long your industry and customers are likely to be affected for – could there be a 3, 6 or 12-month interruption to business as usual? And after the lockdown is lifted, could there be a delay before demand recovers? Keep this length of time in mind for planning how to respond.
3. Know where your investors stand
As a startup, chances are that you’ve calculated your burn rate and planned ahead to have enough cash to last until your next round of funding. However, it's important to remember that your investors are likely to be asking themselves the same questions as you and thinking about the survival of their own business model.
You may need to face some hard truths – is your business still their priority? Even if your business has not been affected, your investors may have made investments in other business that have been, so they may not be investing in the same way moving forward.
It's therefore important to understand what your investors are expecting from you. Do they want you to make drastic cuts to reduce your burn rate, do they want you to pivot to a new business model to survive the crisis (think about restaurants and bars that are moving to a delivery-only model); or alternatively, do they perceive the shutdown to be temporary and want you to go full steam ahead?
If the answer is the latter, it's prudent to ensure a 'full steam ahead' request is backed up with adequate funding to avoid running out of money before other sources of funding or support can come into effect – which we’ll consider next.
4. Consider Government support
Once a startup has its house in order, it must review the options it has available. There are probably more forms of financial support available than you might realize.
For example, all businesses within the hospitality, retail and leisure industry - which have been greatly affected by social distancing measures - are eligible for a business rates holiday for the 2020-21 financial year. There is also a Retail, Hospitality, and Leisure Grant Fund (RHLGF) available to businesses in those sectors with a rateable value of under £51,000.
Other government measures do not discriminate by industry. The Coronavirus Job Retention Scheme was one of the earliest measures announced and allows businesses to furlough members of staff, with HMRC reimbursing 80% of workers’ wages, up to £2,500 per month. At the time of writing, the scheme has been extended until the end of June, reflecting the continuing social distancing measures.
Of special interest to startup businesses specifically - on 20th April the Government announced the launch of the Coronavirus Future Fund, designed to enable high-growth companies (namely startups) to receive investment to remain viable during the coronavirus crisis.
The Government will be offering convertible loans of between £125,000 and £5 million through the British Business Bank. Startups are eligible provided they are UK based, have previously raised at least £250,000 in equity investment over the last five years, and can attract the equivalent match funding from third-party investors as the loan itself.
The scheme is due to launch in May 2020 and may offer another option to startups who are unable to access the existing Coronavirus Business Interruption Loan Scheme.
You can find out more about these schemes here.
5. Seek grants and financial relief from other sources
The Government is not the only source of financial support to weather the coronavirus crisis. There are other sources of finance from both the public and private sectors, at both a national and regional level. One such example is the Greater Manchester Coronavirus Business Interruption Loan Scheme, which is providing a £3 million package of support for businesses in the region.
Some organisations have turned to their customers to help see them through. Boisdale, a high-end restaurant group, has launched a series of vouchers with a 'war bond' theme to raise capital to keep the business afloat during the crisis. Vouchers entitle the bearer to a discounted meal, redeemable over the next year once the social distancing measures are lifted. Could your startup also find funding support from early-adopter customers that are passionate about your offering?
Resilience will be key for startup businesses
The coronavirus crisis is a rapidly evolving picture, with new schemes being introduced or updated regularly, as well as a shifting economic landscape with each major government announcement. This requires startups to remain adaptable and keep up to date with the options available to them.
About the Author
Nic Redfern is Financial Director for Know Your Money. Know Your Money is an independent financial comparison website, launched in 2004. Run by a dedicated team, Know Your Money’s goal is to provide clear, accurate and transparent comparisons for a wide range of financial products, such as business loans, mortgages and car insurance.