The furlough cliff and the return to work

Ben Lloyd

May 14, 2020

Ben Lloyd is MD of Pure Commercial Finance

For a lot of businesses, the thought of dropping off the furlough cliff is a terrifying and unviable concept, particularly where you have businesses that have a lead in time from taking a customer on/point of sale and actually seeing the revenue into the business from that point of sale.

For example, a business like ours, where our product type could see a lead in time that can vary from 6 weeks to 6 months from the point where we onboard a new customer to the point of completion (revenue into the business).

With other businesses, like a lot of retail operations with fast-moving goods, can come out of furlough and go back to work crystalising revenue right at the point of sale/taking the customer on, meaning not having a tapered furlough process could be less impactful in comparison to business like ours.

Looking at the state of play from my own business point of view, we have a set of risks to take into consideration:

1. On average, our revenue lead in time is between six to 16 weeks across our core products.

2. It will likely take at least six to nine months to get back to a consistent revolving pipeline capable of generating reliable revenue.

3. This could also be affected by the timeline of funders returning to the market and the products they are offering – at the moment there are a limited amount still actively lending and this is changing daily and will likely be staggered and depend on funders’ perception of market strength.

4. What shift in appetite our funders will have for our historic customer mix, LTV, asset class, borrower, etc. – this will highly likely impact what point two looks like when we get to the revolving pipeline point. Any diminished appetite, heightened caution or general lack of active funders will naturally have a negative impact on revenue in the short, medium and long-term.

5. Burn rate on capital reserves.

– We would firstly need to consider that coming out of furlough we would have to have a full workforce back, but with very limited initial revenue to support that overhead for the at least the first two months so we would consider a maximum burn rate for that period.

– After two months, we would expect revenue to start to lift and begin to shallow the burn rate, but points three and four will very much impact this in both quantum per month and duration.

Naturally, lead-in times are not limited to just the lending and financial services industry, so this is a very real consideration that the government needs to address to avoid businesses burning out, mass redundancies at the end of the job retention scheme, and for the following year.

Personally, for our business, and I assume for other businesses with a longer lead-in time, a concept that would help avoid redundancies or wiping out a company’s liquidity would be to either:

1. Allow companies to bring furloughed staff back to work, whilst being covered on the JRS for the final month/s. This would create a springboard to bringing the revenue event closer to the end of the JRS and close the amount of time the companies have to suffer maximum burn rate – particularly with a distinctly uncertain medium-term post lockdown, I think this is a very sensible and considered approach to business continuity and risk mitigation.

2. Allow companies to put staff on part time furlough to taper back into full work/full liability in a bid again to partially attempt to close the gap between maximum burn rate and revenue.

In addition to this, I have spoken with a lot of companies that have been declined a CBILS loans. For many businesses, the CBILS loans were applied for to bridge that risk, so now they no longer have that safety net, ensuring that the JRS is tapered is even more critical to business continuity and avoiding mass redundancy.

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