Alon Domb Head of Corporate
Covid -19: further government support under the Coronavirus Business Interruption Loan schemes
In our update on 25 March 2020, we outlined the government’s newest stream of financial measures introduced in the wake of the novel Coronavirus; the Coronavirus Business Interruption Loan Scheme (“CBILS”).
The CBILS, operated by the British Business Bank (and which has now undergone some significant changes as outlined in this article), offers small and medium sized businesses loans up to £5m. The loans have an initial 12 month period in which the government pays the interest on the loan (the Business Interruption Payment) and are originated by one of the scheme’s accredited lenders whilst the UK Government provides a guarantee to the lender for 80% of the loan value. The loans are available to those businesses with a maximum turnover of £45m per year which operate in eligible sectors.
On the 20 April 2020 a loan scheme for medium sized and larger businesses was introduced called the Coronavirus Large Business Interruption Loan Scheme (“CLBILS”), which is also operated by the British Business Bank. Under CLBILS a lender can provide up to £25 million to businesses with turnover from £45 million up to £250 million and up to £50 million to businesses with a turnover of over £250 million. Many features of CLBILS are the same as CBILS, but there are some important differences which are discussed below. It is hoped that this scheme will assist those “squeezed middle businesses” who are unable to qualify for either the CBILS or the Covid Corporate Finance Facility (“CCFF”) and give banks the confidence to lend to more businesses which are impacted by coronavirus but which they would not otherwise lend to on a commercial basis without government support for the lending.
On 27 April 2020, the government added a further lending scheme to support small businesses. Under this scheme small businesses will be eligible to receive loans of up to 25% of their turnover, capped at £50,000, which will be 100% guaranteed by the government and which will be advanced within days of successfully applying (the “microloan scheme”). Applicants for the microloan scheme will need to complete a two-page self-certification form online and, unlike CBILS and CLBILS, businesses will only need to show that they were viable prior to the crisis, not that they will be viable after it. The microloan scheme will share features with CBILS, including Business Interruption Payment to cover interest payments in the first 12 months. It was announced that the microloan scheme should be open to applications from 5 May 2020.
This follow up Q&A updates you on some of the notable issues encountered with CBILS and provides an overview of the CLBILS.
What are the issues with CBILS?
Relatively few loans were made in the first three weeks of the scheme in relation to the number of formal applications and enquiries made. Figures released by industry body UK Finance showed that up to 14 April 2020 a total of £1.1 billion has been lent under 6,020 loans under CBILS and that only 21% of the 28,460 formal applications for CBILS loans had been approved. At the end of last week, the chancellor reported that this had increased to around 12,000 loans worth almost £2 billion.
There is a lack of transparency with many lenders not publishing data about CBILS lending. On the 11 April 2020 the Telegraph reported that the Royal Bank of Scotland has made nearly three quarters of all loans. More recent reports suggest other lenders, such as HSBC, have made a significant number of loans but with most lenders not publishing their figures it is difficult to know who is and who isn’t lending. Chair of the Treasury committee Mel Stride MP wrote to the British Business Bank and UK Finance on 20 April 2020 to ask them to publish daily information on the number of enquiries, applications, acceptances, rejections and total amount lent under the scheme.
There has been criticism that lenders are requiring too much information from businesses before lending to them. On 6 April 202 the Financial Times reported that a scheme similar to CBILS in Switzerland has a one page application process with money being transferred to the business the following day, or in one case it reported after just 30 minutes. The introduction of the microloan scheme should go some way to addressing these issues for smaller businesses.
There have been calls for the government to guarantee 100% of the loans made, as is the case with Swiss and German Schemes, but until the announcement of the microloans scheme the chancellor had dismissed these, saying that he was not persuaded it is the right thing to do.
The scheme at present is also only being provided by a relatively small group of banks and other lenders and there is concern that they will not have the capacity to process all the CBILS applications quickly enough for the scheme to achieve its purpose of providing much needed liquidity to save businesses.
What are the changes to CBILS?
There have been a number of changes to CBILS since its inception:
- Applications will not be limited to businesses that have been refused a loan on commercial terms, therefore the previous requirement for companies to have first tried to get a normal commercial loan elsewhere have been be dropped. This will have the effect of extending the number who benefit from the scheme. However, the Treasury has not capped the interest rates banks can charge;
- Under the scheme, personal guarantees of any form will not be taken for facilities below £250,000;
- For facilities above £250,000, personal guarantees may still be required, at a lender’s discretion, but (i) recoveries under these guarantees are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied; and (ii) a principal private residence cannot be taken as security; and
- New alternative finance lenders are being accredited under the scheme, such as the recently accredited Funding Circle, creating more choice and diversity of supply for smaller businesses.
How does CLBILS differ to CBILS?
The newly introduced CLBILS shares many of the same features as CBILS, but it does differ in some important respects:
- To be eligible for CLBILS businesses must have a turnover of over £45 million and not taken up the Bank of England’s CCFF scheme.
- The maximum facility under CLBILS is £25 million for qualifying businesses with a turnover up to £250 million and £50 million for businesses with a turnover above £250 million.
- There is no ‘Business Interruption Payment’ from the government to cover the first 12 months of interest payable under the loan, which businesses must pay (but interest and fees are covered by the 80% guarantee).
- The term of all facilities is up to three years, which is the same as CBILS for overdrafts an invoice finance, but half the six year maximum under CBILS for term loans and asset finance.
What information do lenders require of companies seeking CBILS or CLBILS?
The required information varies between participating lenders, but the British Business Bank states that this might include:
- Cash flow forecasts of the business over the short to medium term and details on the purpose of the borrowing;
- Financial statements showing the performance of the business prior to the impact of Coronavirus (e.g. management accounts and historic accounts);
- The impact of Coronavirus on the business;
- Details of existing finance commitments and assets.
It should be expected that the information lenders will require to make larger loans, particularly under CLBILS, will be more comprehensive.
Do the Chancellor's changes go far enough?
The introduction of the microloan scheme should increase rapid access to finance for small businesses. Whilst the improved accessibility for the larger schemes is most welcome, with further lenders being added to these schemes, it remains unclear whether this will be sufficient to address the current delays to getting applications approved (although there are signs of this beginning to improve) in order to address the urgent liquidity requirements of businesses across the UK. For these schemes to achieve their purpose it is likely that further changes will be required and the government may need to consider increasing its guarantee. Clearly this is a difficult balancing act for the Chancellor to both support business and to protect the tax payer.
The schemes run alongside the Government’s recent decision to temporarily suspend wrongful trading provisions, applying retrospectively from 1 March 2020 (see our update here). These measures come at a welcome time to assist company directors to navigate their options in securing liquidity to keep businesses afloat, nevertheless directors trading in the zone of insolvency must remain mindful of their duties to creditors, as well as other potential liabilities under the Insolvency Act, and now more than ever, it is important that directors obtain legal and financial advice when incurring debt in order to trade their way out of the current crisis in circumstances where their company is potentially facing the prospect of insolvency.
This Q&A does not constitute legal advice. Should you have any queries, or you would like our assistance in considering the issues raised in this Q&A then please do not hesitate to contact the authors of this article or your usual contact at Ince. Our team stands ready to assist.