3rd April 2020

Welcome updates have been announced around the application of the Coronavirus Business Interruption Loan Scheme (CBILS) which are due to become operational from 6 April 2020.

We understand that, despite the best efforts of the government, lenders and the British Business Bank, many of our clients have been frustrated in their efforts to apply for a loan that is part-guaranteed by the governments “Coronavirus Business Interruption Loan Scheme”. We hope that the measures announced last night (02/04/2020) will help this scheme become much more accessible for those in urgent need of cash flow support. This note sets out those changes, and the reasons the government has acted on them so quickly.

Although well intentioned, it has become clear that the expected benefits of CBILS have not been finding their way down quickly or effectively enough to a vast population of SMEs trying to access them. On Friday 3rd April it was announced that around £90m of loans to 1,000 businesses had been approved under the government’s CBILS initiative, but with a fund of £330bn to deploy, there is clearly a lot more critical cashflow support available to SMEs that needs to be made available in a short space of time for the scheme to be considered effective.

Details of the initial scheme were announced on 23 March 2020, with the government offering lenders a guarantee of 80% on loans, overdrafts, invoice finance and asset finance of up to £5 million and for up to 6 years. This was targeted on loans to businesses with a turnover of less than £45m.The government also contributed a Business Interruption Payment to the lender to cover the first 12 months of interest payments and any lender-levied fees.

As has been widely reported the scheme has got off to a difficult start, there is a significant backlog in applications and confusion over how the scheme rules are meant to be applied. The main areas of recurring concern were as follows –

  • The scheme required accredited lenders to make finance available to SMEs on normal commercial terms first. Only if the lender could not do so was it permitted to consider if the SME is eligible for CBILS. This has caused many applicants to be steered away from CBILS and therefore unable to access it benefits.
  • As CBILS loans were aimed at companies with an annual turnover of less than £45m, many mid-sized firms, who could not access the parallel Covid Corporate Finance Facility (which is intended for larger companies with established credit ratings) were left with no additional support
  • In light of the 80% loan guarantee being offered by the Government, and the prevailing circumstances that businesses are facing, there has been confusion and frustration around the requirement for lenders to seek additional security and particularly the need for Personal Guarantees to be given by loan applicants.
  • The application process is too slow

Getting CBILS loans to flow between lenders and businesses is of critical importance to the Governments strategy to safeguard the economy for recovery post COVID-19. The Chancellor has therefore reacted quickly to these concerns and we welcomed his announcement of a series of scheme changes which are due to take effect from Monday, 6th April 2020:

  Original guidance
(23 March 2020)
Updated guidance
(from 6 April 2020)
Debt products available Term loans

Overdrafts

Invoice finance

Asset finance

 
Company turnover limit to be eligible for the CBILS £45m (group) A new Coronavirus Large Business Interruption Loan Scheme (CLBILS) will be announced later this month that will provide a government guarantee of 80% to enable banks to make loans of up to £25 million to firms with an annual turnover of between £45 million and £500 million.

Loans backed by a guarantee under CLBILS will be offered at commercial rates of interest and further details of the scheme will be announced later in April 2020.

Loan size covered by the guarantee Up to £5,000,000 See CLBILS above
Maximum term length Six years for Terms Loans and Asset Finance and three years for overdrafts and invoice finance  
Government support The scheme provides the lender with a government-backed, partial (80%) guarantee against the outstanding balance of the finance.

The Government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied charges.

There are no guarantee fees for the SMEs making use of the scheme (banks to pay the government to access the guarantee)

 
Security Accredited lenders are required to make finance available to SMEs on normal commercial terms first. If the lender cannot do so only then is it permitted to consider if the SME is eligible for CBILS.

Under the scheme the government guarantees 80% of any net losses in the event of default of a CBILS backed loan after all available security has been taken and realised by the lender. The lender, therefore, will always carry at 20% exposure in the event of an under-recovery.

Under a CBILS loan, lenders are required to apply their own normal underwriting criteria in determining security requirements which may include the taking of security and personal guarantees.

CBILS requires that no security be requested over the primary residence of business owners

Insufficient security is no longer a condition to access the scheme. For all facilities, including those over £250,000, CBILS can now support lending to smaller businesses even where a lender considers there to be sufficient security, making more smaller businesses eligible to receive the Business Interruption Payment.

It has been confirmed that lenders will not take personal guarantees for facilities under £250,000.

Personal guarantees may still be required, at a lender’s discretion, for facilities above £250,000, but they exclude the Principal Private Residence (PPR) and recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied.

 

According to the British Business Bank, the above changes should be retrospectively applied by lenders for any CBILS facilities offered since 23 March 2020, of for any commercial facilities extended from this date that now would qualify for CBILS had the above changes been in effect.

We are pleased with the proposed scheme revisions and look forward to seeing details of the CLBILS initiative. To address the concern over the speed of application, we understand that the British Business Bank is working hard to introduce more lenders onto the scheme, and that current scheme lenders are quickly refining their credit and application processes to streamline the process.

Application requirements will vary depending upon the size and complexity of the lend, each lender will also have its own requirements and process. Some things to consider preparing would include –

  • Outline of the business activities and its operations.
  • Historic financial information to demonstrate that the business was a viable lending prospect before being impacted by the Coronavirus (last 2 to 3 years Accounts and monthly management accounts, if available). Include a high-level commentary of key business drivers and performance indicators across this period.
  • Latest Balance Sheet and details of any existing facilities in place
  • Details of the funding requirement and application of funds.
  • Details of any security available.
  • Forecasts showing the expected impact of Coronavirus on company cash flows (weekly rolling for at least 12 weeks) and the assumptions linked into the post-coronavirus recovery going out further. Make these as flexible as possible to allow for various scenarios to be modelled through with a key focus on the levers that impact cash.
  • Forecast debt serviceability.
  • Details of the senior management team highlighting any experience they have in dealing with challenging events.
  • Company ownership details, the owner’s investment in the company and other interests
  • Actions taken to date to ensure the business is protecting its cash position and planned further measures.
  • Future business prospects and employment benefits of receiving funding.

In the first instance we would suggest that businesses discuss CBILS with their existing bank, as this has proven to be the quickest route to assessing borrowing options under the scheme. There is an option to open a dialogue with other CBILS lenders, but many of those are understandably focusing on existing clients as a priority. If helpful, we have made available a 12-week cash flow forecast template that we hope will be of use to businesses applying for the scheme:

Click here to download our 12 week cash flow forecast template

We are aware ​that many businesses are having to quickly prepare 12 week cash flow forecasts. This is either as part of the application process for the Coronavirus Business Interruption Loan Scheme (CBILS) and/or as part of their own internal cash management process. To lend our support to business in the North East, we have prepared a user friendly template, which is free to download.

If you would like to discuss any of the information in this article in more detail, please get in touch. 

John Healey (Corporate Finance Partner)
johnhealey@unw.co.uk or 07949 235813

Paul Kaiser (Corporate Finance Partner)
paulkaiser@unw.co.uk or 07768 808877

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