We have received several enquiries about the newly announced Coronavirus Business Interruption Loan Scheme (CBILS) as many clients are looking to find out more information about how it will work. Paul Hardman, Director of Corporate and Commercial, answers some of those most frequently asked questions.
What is the Cornavirus Business Interruption Loan Scheme (CBILS)?
CBILS is for borrowing proposals which, were it not for the current COVID-19 pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable the business to trade out of any short to medium term difficulty.
Is my business eligible?
To be eligible for a facility under CBILS, your business must be a UK business with an annual turnover of not more than £45m. However, the broader point is that you need to be able to see your way through to the other side of the current COVID pandemic and this will require confidence that the business that will emerge afterwards will be viable and is likely to be able to repay the loan. It is not suitable if your business will not survive without an immediate cash injection (see How long will it take to complete? below for further details and one way business might be able to address this)
How does the Cornavirus Business Interruption Loan Scheme work?
The Scheme is modelled on the EFG (Enterprise Finance Guarantee Scheme). The Government will guarantee to the lender 80% of the outstanding balance after the bank has recovered as much as it can of the loan. For example, if the loan outstanding is £200,000 and the lender recovers £100,000 (for instance by selling secured assets) the Government will pay £80,000. Note that the Government guarantee does not apply to the whole of the loan amount but to the unrecovered outstanding balance, so the lender will always be out of pocket (as to the 20%) if the borrower fails and there is insufficient security.
What is the banks attitude to risk going to be?
The banks and other lenders will assess risk in the usual way but they will take a more relaxed view about the ability to service the loan and they will take into account the other business support measures that the Government has introduced as regards ability to pay over the duration of the current crisis but they will want to see that the burden of the loan can be supported when we return to more normal times.
Will I be expected to guarantee the loan?
Yes, many lenders will expect personal guarantees to support lending and, for instance for loan amounts up to £250, 000, these can, at the lender’s discretion, be unsupported by tangible security but borrower should anticipate that a personal guarantee for the full amount will be required. You should remember at all times that as a borrower you are 100% liable to repay the loan.
How much can I borrow?
The upper limit on borrowing under the Scheme is £5m but borrowers can expect the actual amount to be determined by a number of factors the key ones being the amount required, the loan repayment date (up to 6 years for term loans and asset finance and 3 years for overdrafts and invoice finance facilities) and the ability of the borrower to meet the loan repayments. For instance, at Barclays for loan maturity dates after the end of 2020 the loan limit will be either:
- Annual wage bill of 2019 x2
- 25% of 2019 Turnover
- Client certified requirement for liquidity for the forthcoming 18 months.
In order to assess the most appropriate loan, lenders will take into account:
- the loan amount including some headroom, taking into account the level of disruption and any other support that can be obtained such as VAT deferment, any support for wages and salaries, rent/rates deferment etc. Up to date management information with forecasts taking into account a period of disruption and recovery will be required together with the assumptions behind how the loan amount has been arrived at.
- the amount that can be repaid once when trading returns to normal. As part of their responsible lender commitment, lenders will wish to establish with borrowers that the lending can be easily met as and when normal trading resumes.
Can I use it to replace existing lending?
There is no absolute prohibition on using the new loan to repay old lending and this may be an opportunity to re-schedule debt, but borrowers may have early redemption charges and penalties and should take specific advice.
What about funding for growth?
The CBILS scheme is designed for short term cash flow drops caused by the current COVID19 crisis. If the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will can do so but this will be outside the CBILS scheme.
How much will it cost?
The Government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees and some lenders have indicated that they would not charge arrangement fees or early repayment charges borrowing under the Scheme. This makes the cost of funding relatively inexpensive but there may still be costs associated with putting together business plans, obtaining valuations to be used as security and legal costs (both lender’s and borrower’s) of reviewing the security offered and putting in place the loan.
How long will it take to complete?
The loan application will have to go through the usual process of negotiation, consideration and approval by the credit team. There is a significant interest in the Scheme which is likely to translate to a substantial number of applications, all of which are going to take time to process. Best guess estimates are that it will take a few weeks to complete the process but it will be a matter of how prepared you are with management information, whether you need new valuations and whether new security is being granted. It may be possible to extent an existing overdraft facility whilst the paperwork is being sorted out.
Do I need to come into the bank to sign?
There will be practical issues to consider at this difficult time. Face to face meetings should not be countenanced in most circumstances and this will mean that borrowers will need to ensure that their own management and professional support teams have the capability to deal with matters remotely. The Solicitors Regulation Authority recent guidance for solicitors indicates that for well-prepared firms some leniency will be allowed around the customer due diligence (or “know your client”) requirements. At Gregg Latchams we are working remotely and have adopted a new policy to allow us to identify clients using video technology to capture photo and address identification documents.
However, documents will still need to be signed. The law in this area is open to a number of ways in which signatures can be validly attached electronically but the lender will have its own more particular requirements and where a document requires a witness to sign the witness must still be in the actual presence of the signatory. Careful use of postal services may be required, therefore.
Update on the CBILS scheme – 16th April 2020
On 3 April 2020 the UK government announced changes to the Coronavirus Business Interruption Loan Scheme (CBILS) designed to address concerns raised with the initial terms of the Scheme and to help get much needed cash to SME companies. In addition, the Government has now extended the accredited lenders who are eligible to offer lending under the Scheme. British Business Bank which operates the Scheme has a useful website which makes it easy to filter loan provider by loan size and location.
Has the announcement made any difference?
The changes announced by the Government have made a difference. Banks are required to drop any requirement for a personal guarantee for loans under £250,000 and to limit recovery to 20% of the outstanding balance after the proceeds of business assets have been applied where personal guarantees are required for loans over £250,000. At least one bank (Barclays) has completely done away with the requirement for personal guarantees on any loans.
What about the lending criteria?
The lending criteria have shifted from normal commercial criteria (i.e. can the loan be serviced; is there sufficient security) to determine the level of borrowing to an assessment of the impact of the Covid pandemic on the loss of revenue to the business after all other Government support measures are taken into account. This makes it a much more joined up package with the other measures but there will still be a requirement to demonstrate the impact on the business in cash flow terms and that will require a reasonable level of good financial reporting (management accounts etc) and forecasting acumen. The Government is keen that the Scheme is not used by opportunists and borrowing is therefore limited to the amount that can be attributed to the impact of Covid.
Insufficient security is no longer a condition to access the Scheme. This turns normal bank lending rules on their head and should make the whole process (which otherwise requires valuations to be undertaken) a lot quicker. For loans up to £250,000 some lenders are not requiring any new security and for loans over £250,000 they are relying on existing unchanged business assets for any new security. Specifically, the main home cannot be used as security.
Are there any draw backs?
In normal times these loans would look almost too good to be true and even since the first iteration of the Scheme the loans look much more like the cash injection lifeline that the Chancellor described. However, they are still taking time for borrowers to prepare the necessary supporting information and for lenders to process those applications and obtain internal approvals. And they still are loans with all the characteristics of loan liabilities that is to say, they will sit on the balance sheet until repaid and will constrain activity for some time after we are all (hopefully) back in the swing of work as we used to know it.
Our team of specialist corporate and commercial solicitors in Bristol and London are ready to help. If you are looking for advice and guidance please call 0117 906 9400 or email firstname.lastname@example.org
Further government information can be found here.