As this is a fast moving topic, please note that this article is current as at 25/03/20. For further information, please contact Jacqueline Curran.
With the UK now in effective lockdown due to the restrictions put in place to tackle the COVID-19 pandemic in the UK, the impact on the finances of small and medium sized enterprises (SMEs) in the UK will be considerable.
One of the key measures announced by the Chancellor of the Exchequer, is the Coronavirus Business Interruption Loan Scheme (CBILS), which is designed to help SMEs experiencing financial difficulty. The CBILS, which is coordinated by the government-owned British Business Bank, can provide loan facilities of up to £5 million for small businesses facing serious impact on revenue and cash flow. The finance products available include term loans, overdrafts, invoice finance and asset finance.
It is designed to support SMEs who do not meet a lender’s normal lending requirements for a fully commercial loan, but who are considered by the lender viable in the longer-term.
Who is eligible for the scheme?
To be eligible for a loan facility SMEs must:
- Be UK based in its business activity with annual turnover or no more than £45 million.
- Generate more than 50% of its turnover from trading activity and the facility will primarily be used to support trading in the UK.
- Have a borrowing proposal which, were it not for the COVID-19 pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable it to trade out of any short-to-medium term difficulty.
Who is lending?
While the British Business Bank is managing the scheme, the financing is available and processed through the British Business Bank’s current 40+ accredited lenders, which are listed on its website.
Key features of the scheme
- Up to £5 million facility: the maximum value of a facility provided under the scheme will be £5 million.
- Repayment terms: the loans will be available on repayment terms of up to six years.
- 80% guarantee: the scheme provides the lender with a government-backed, partial guarantee (80%) against the outstanding facility balance, subject to an overall cap per lender.
- No guarantee fee for SMEs to access the scheme: lenders will pay a fee to access the scheme and the 80% guarantee but no fee will be charged for smaller businesses.
- Interest and fees paid by Government for 12 months: the government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees, so smaller businesses will benefit from no upfront costs and lower initial repayments.
- Finance terms: finance terms are up to six years for term loans and asset finance facilities. For overdrafts and invoice finance facilities, terms will be up to three years.
- Security: at the discretion of the lender, the scheme may be used for unsecured lending for facilities of £250,000 and under. For facilities above £250,000, the lender must establish that no security is available prior to businesses using CBILS. If the lender can offer finance on normal commercial terms without the need to make use of the scheme, they should do so. Business owners cannot use their primary principal residence as security for the loans.
- The borrower always remains 100% liable for the debt and repayments.
Are there any exclusions?
Banks, building societies, insurers and reinsurers, the public sector, state funded schools, trade unions and professional or employer based, religious and political membership organisations are excluded from participating. Fishing, aquaculture and agriculture businesses may not qualify for the full interest free and fee levy in the first twelve months.
The CBILS guarantee is for the benefit of the lender and not the business and is of 80% and not the total amount of the debt. Borrowers will remain 100% liable for the debt and so will be ultimately responsible for repayments and therefore any shortfall in the government’s guarantee which will be a concern. Businesses may also be reluctant to take on further debt when the longer term impact of the current crisis on the economy is not yet known.
All applications should be made with the accredited lender and not to the British Business Bank, with decision making being fully delegated to the lender. Businesses should apply to their own lender (assuming it is participating in the scheme) in the first instance but may consider approaching other lenders if they are unable to access the finance they need.
While all efforts to provide relief to SMEs in this difficult period are to be welcomed, there are some potential drawbacks to the scheme. Applications are through the lenders’ usual application channels and therefore the process could be time consuming during a period where businesses are facing urgent need for cash resource. Traditional lenders’ systems may not be digitally nimble enough to be up to the task in hand, particularly at a time when staff are home based or where there is reliance on call centres, leading to the possibility of delay in accessing and receiving the financing.
Additionally, there have been concerns that the decision making is based on a lender’s subjective assessment of whether the applicant business is “viable” had the COVID-19 pandemic not been a factor, and that the business will be able to use the funding to trade through the short to medium term difficulty. This raises question marks over the criteria to be applied, leaving loss making enterprises or those businesses focussed on initial growth rather profit, potentially without recourse to funding via this initiative.
So, while the creation of the CIBLS at short notice is positive news, it may not provide the short term fix that some SMEs urgently require and so they may need to look closely at the other supportive measures announced by the government, such as rates holidays, grant funding or deferring of VAT payments to ease their immediate financial pressures.