First things first – talk to your lender
You may already have heard from your lender setting out the kinds of things they can help with. Many have already announced that they are setting aside large amounts of money to support businesses through the current crisis.
These may include things like:
- Short term support through reduced or deferred payments for commercial mortgages or other loans, with longer term support through extending the remaining term of their mortgage or loan, switching rates or switching part or all to interest-only arrangements;
- Support for customers with unsecured debt through reduced payments or breathing space to defer payments due;
- The option of a temporary increase in credit card and overdraft limits;
- Dedicated helplines; and
- One to one calls with your relationship manager
Your first port of call should be your relationship manager at your lender, who should be best placed to steer you in the right direction. It may be that you can get the help you need without having to resort to the government scheme.
Coronavirus Business Interruption Loan Scheme (CBILS)
CBILS became available on Monday 23 March and will offer access to loans, overdrafts, invoice finance and asset finance of up to £5 million for small to medium sized businesses (SMEs) who have encountered disruptions to cash flow because of the coronavirus pandemic.
CBILS was relaunched in early April following criticisms that not enough businesses had been able to access it, largely because the original criteria prevented lending to SMEs that would otherwise qualify for a normal commercial loan. The key changes (which are incorporated into this article) are as follows:
Personal Guarantees: Not permitted for loans under £250,000. For loans in excess of £250,000, banks may require a personal guarantee, but this must be limited to 20% of the amount of the loan remaining after the proceeds of business assets are applied.
Personal Residence: Your principle private residence cannot be taken as security for a loan or guarantee.
Security: Lending is now permitted under the CBILS even where the lender considers that the borrower would have sufficient security to secure a normal commercial loan.
These changes have been applied retrospectively. Where a CBILS applicant has instead been given a standard commercial loan, lenders have been asked to bring these facilities into the CBILS wherever possible. If this is what has happened to you, you should check with your lender whether your loan can now be transferred to the CBILS scheme.
You can also reapply for a loan where you have previously been rejected because you did not meet the eligibility criteria before they changed.
How it works
CBILS will operate for qualifying loans made in the six months from 23 March 2020.
It is free to access and works by the Government agreeing to provide a guarantee to lenders of up to 80% of the finance made available to a borrower under the scheme, making it possible for lenders to lend where they might not otherwise be able to BUT it does not change the fact that your business will remain liable to repay all the money that it borrows. If you are a sole trader or partnership, therefore, that means you will be personally liable. Borrowers are also able to request a Business Interruption Payment (BIP) from the Government. This is a grant payment to cover interest and costs applicable to a CBILS loan for the first 12 months. This is paid directly to the lender but it should mean that the borrower enjoys reduced costs for the first year.
There are 40 accredited lenders able to offer the scheme, including all the major banks.
A number of business finance facilities are available, including:
- Term loans
- Asset finance
- Invoice finance
Note: Not every lender can provide every type of finance listed.
CBILS – key features
CBILS temporarily replaces the Enterprise Finance Guarantee Scheme (EFGS), and relaxes a number of the eligibility criteria that applied for the EFGS. In particular, unlike EFGS, borrowers do not have to pay anything for the Government guarantee.
- First 12 months interest free – Government will make a Business Interruption Payment to cover the first 12 months interest and any lender fees, so reduced up-front costs and lower initial repayments;
- Loans of up to £5 million;
- Terms loans and asset finance available on terms from three months to six years;
- Terms of up to three years for invoice finance and revolving facilities;
- Loan guarantee for the lender of 80%, which could turn a “no” into a “yes” – but this guarantee is for the lender’s benefit only and does not relieve the borrower of liability under the loan.
Does my business qualify for CBILS?
The terms of, and eligibility criteria for, CBILS have already changed since first announced by the Chancellor and it is possible that further changes will be announced as the Government’s response continues to evolve in response to the pandemic. Our guidance will reflect changes as they are announced but please bear in mind that this is a fluid and fast-moving issue so you should always check the British Business Bank website.
A business is eligible for the scheme if:
- it is UK based, with turnover of no more than £45 million per year;
- at least half of its turnover comes from trade in the UK and the loan will be used to support trading in the UK;
- it has a borrowing proposal which, were it not for the coronavirus pandemic, would be considered viable by the lender. This will involve providing financial information about the business and your business plan and explaining how your business is impacted by coronavirus;
- it self certifies that it has been adversely affected by coronavirus.
Businesses in most sectors can apply – there are some exclusions (including banks, public sector entities, schools, hospitals, fisheries and agricultural businesses), for more information see here.
Business Interruption Payment (BIP)
If you qualify for CBILS you will also be offered a BIP. The amount of this is calculated by the lender as the amount required to pay interest and costs in respect of the loan for the first 12 months. When you apply, you will also be sent a letter offering you the BIP which you will have to sign to confirm acceptance. The BIP is paid straight to the lender and is applied to satisfy those up-front payments. You should be aware that it may not cover break costs or early repayment fees if you repay the loan early, so you should pay attention to these.
How much can I borrow?
The maximum possible loan is £5million, but you will not necessarily be able to borrow that much because for each borrower it is capped by reference to an amount equal to one of the following:
- double the business’ 2019 wage bill;
- 25% of the business’ turnover in 2019; or
- the liquidity requirements of the business for the next 12 months (as certified by you).
The lender can decide which of these measures it wants to use.
For facilities with expiry dates before 31 December 2020, lenders have some discretion to lend above those thresholds.
There are adjustments for new businesses that do not have 12 months trading figures.
The £5 million will be spread across all your CBILS/EFGS loans so you will have to disclose any that you have already received as part of your application.
You can convert an existing EFGS loan to a CBILS loan, but you have to go through the CBILS application process in order to do so.
How does my business apply to access CBILS?
Again, talk to your relationship manager who should be able to help you and advise if you are eligible.
You can make an application direct to one of the accredited lenders. Most high street and challenger banks have rolled out CBILS on-line so this should be easy to find. We understand that lenders are experiencing high volumes of demand so applying online may be the best option.
The paperwork is almost identical to the EFGS. As with EFGS, there is a requirement to complete a Data Protection Declaration and an Information Declaration confirming the accuracy of financial and other information provided in your application.
How likely am I to be successful if I apply?
Decision-making on whether you are eligible for CBILS is fully delegated to the accredited CBILS lenders. These lenders range from high-street banks, to challenger banks, asset-based lenders and smaller specialist local lenders.
Lenders are no longer obliged to refuse access to CBILS where they could offer finance on normal commercial terms without the need to make use of the scheme.
The Government guarantee is designed to allow lenders to lend money to SMEs with viable business propositions. This means that the lender will still need to be satisfied that the business is viable and just needs cashflow help so that it is or will, with the benefit of the loan, be viable.
This means that you will need to provide certain evidence to show that you can afford to repay the loan. For larger facilities, this is likely to include:
- Management accounts
- Cash flow forecast
- Business plan
- Historic accounts
- Details of business assets
The exact requirements will vary from lender to lender and you should discuss them with the lender. For smaller loans, the process may be automated and therefore may not require the same level of documentation.
You can apply to more than one lender, just as with a normal commercial loan. As noted above, you can also re apply if you think you will now meet the revised criteria.
It is unclear exactly how lenders will apply the lending criteria under CBILS, although the recent changes are undoubtedly helpful. Early experience is that lenders are continuing to apply strict credit criteria in accordance with their pre COVID procedures and may be finding it difficult to assess how a business might have been expected to perform in the absence of the Pandemic, and, indeed, what actual future performance might look like given the uncertainty about how long the crisis will last. Lenders must still also consider affordability, responsible lending and other regulatory requirements, so the scheme is definitely not a “blank cheque”.
Although there is no formal appeal system, the Bank of England is encouraging Borrowers to feedback experience to their Local Agents, to enable them to identify trends and logjams. You can find your Local Agent here.
Will I have to give security or a personal guarantee?
Loans under £250,000 can be granted unsecured. Personal guarantees are not permitted for these loans. If you have already given a personal guarantee, the lender cannot make any demands on it.
Over the £250,000 threshold, CBILS obliges lenders to establish what is available as security and as such the business may be asked to create security over any assets it owns. Lenders may also request personal guarantees, but these must be limited so that the most that can be recovered is 20% of whatever remains outstanding of the loan after the other assets of the business have been used to repay the loan. So for example – if a business defaults on a £500,000 loan, at a time when the outstanding balance is £400,000, the lender must first recover what it can from the business and any security (say £200,000) leaving a balance of £200,000. It could then call on the personal guarantee for 20% of that amount or £40,000. Anything remaining after that would be covered by the 80% Government guarantee.
If your business has assets that can be given as security, under the revised scheme, a lender can still offer you a CBILS loan, even if it would otherwise have offered you a commercial loan.
You cannot be asked to give security over your personal home.
If you or your business already borrow from the lender and you have given security over your private residence or a personal guarantee in respect of that loan, you should ask the lender to confirm that the security or guarantee will not also be used to secure or guarantee the CBILS loan.
How long will it take?
There is no “fast track” approach at the present. Because lenders have to undertake their normal “Know Your Customer” and credit checks, experience is that loans are taking weeks, not days, to process.
There are a number of practical issues for lenders because they are having to put resources in place to deal with a vastly increased number of requests, while their take-on and credit processes are no less rigorous than they are for other types of lending. It’s also unclear how much resource lenders will have to dedicate to new lending propositions when they are also dealing with multiple variations to existing loans.
The process is likely to be quicker if you already have a relationship with your chosen lender and temporary overdraft or credit card lines might be easier to obtain in the short term while longer term funding is put in place.
Coronavirus Large Business Interruption Loan Scheme (CLBILS)
The CLBILS for companies with a turnover over £45,000,000 (note there is no upper ceiling) launched from Monday 20 April. It is similar in a number of respects to the CBILS but does have a few differences.
How much can I borrow?
- Up to £25m for borrowers with a group turnover of up to £250m; and
- Up to £50m for borrowers with a group turnover greater than £250m.
In each case the amount borrowed should not be greater than:
- double the borrower’s annual wage bill for the most recent year available, or
- 25% of the borrower’s total turnover for the most recent year available, or
- with appropriate justification and based on self-certification of the borrower, the amount may be increased to cover their liquidity needs for the next 12 months.
Am I eligible?
To be eligible for CLBILS a business must:
- Be UK-based in its business activity
- Have an annual turnover of more than £45 million
- Have a borrowing proposal which the lender would consider viable, were it not for the current pandemic, and for which the lender believes the provision of finance will enable the business to trade out of any short-term to medium-term difficulty
- Self-certify that it has been adversely impacted by the coronavirus (COVID-19)
- Not have received a facility under the Bank of England’s Covid Corporate Financing Facility (CCFF).
Differences between the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme
The British Business Bank has published a helpful table, which you can view here.
In the news
Lenders have generally welcomed the revamped scheme and said that it will help to speed up the flow of loan approvals.
RBS chairman Sir Howard Davies admitted there had been problems but said that he expects to see a “sharp increase” in lending to small firms in the next few days. “We’ve had good discussions with the Treasury and small firms, and I think the changes announced overnight will make a quite a big difference.”
For many the process is still slow as lenders must still comply with Know your Customer, regulatory and credit approval processes before they can lend. These delays can result in businesses failing before they can secure funding. There do not seem to be any proposals for simplifying these. Banks are, however, working to speed up the process but clearly this has to be balanced with the need to make sound lending decisions.
The hurdle that a business must still be a “viable lending proposition” puts funding beyond the grasp of some. Pressure is mounting to change the system – perhaps to the 100% guarantee scheme adopted in Germany. This might help, but arguably might also lead to a higher default and fraud rate if lenders are not at risk of loss.
One proposal which is gaining traction is to increase the guarantee scheme to 100% of loans under £25,000. This highlights another issue, which is that lenders are focussing on larger loans and some are not even offering loans below £25,000, possibly because of the administrative difficulties highlighted above, with the added complication that these loans fall within consumer credit legislation for partnerships and sole traders. In his announcement on Tuesday 21 April Chancellor, Rishi Sunak Ruled out a 100% guarantee even on small loans – saying he is not persuaded it’s the right thing to do, but it’s something that business continues to press for.
Rain Newton-Smith (Chief Economist, CBI) commented in a CBI hosted webinar of 23 April, that while a 100% guarantee for smaller loans might mean that more risk is loaded onto the taxpayer through the guarantee scheme, this may be a risk worth taking to achieve the objective of getting as many businesses as possible through the crisis.
Recent news suggests that the Treasury is considering offering 100% guarantees on loans up to £25,000 for “micro businesses”. According to BBC business editor Simon Jack, eligibility for loans has not yet been decided – namely, how small does a business have to be to qualify for a loan for which the lender gets a 100% guarantee. As many as one million of the UK’s smallest businesses, employing no more than 10 workers, could benefit from the new rules, analysts say. These include shops and pubs, which have been forced to close under coronavirus lockdown measures.
An announcement is expected next week, if not earlier.
The approach of lending to cover cashflow losses points up one of the biggest difficulties of the scheme, which is that many businesses whose cashflow has completely dried up do not apply for a loan because they do not see any prospect of being able to repay it, however good the terms, especially in the light of the dire economic predictions being aired in the press.
In the large corporate space, anecdotally take up is expected to be lower, because companies in this bracket are expected to be more likely to be already leveraging existing relationships
These are updated from time to time to address issues as they are identified so it’s worth checking back regularly.
Enjoy That? You Might Like These: