When the Chancellor, Rishi Sunak, first announced the Coronavirus Business Interruption Loan Scheme (CBILS) on March 17, as part of the Budget, it was taken as the first sign that Government was prepared to do “whatever it takes” to support firms affected by the pandemic.
The CBILS is a £330 billion package of loan guarantees created to encourage lenders to provide much needed finance to UK businesses that are struggling from cash-flow issues as a result of Government measures to contain the spread of coronavirus.
The loan facility is beneficial to the lender because the Government has agreed to guarantee 80 per cent in cases of nonrepayment and it’s good for the debtor because the loan is interest free for the first year.
But since the scheme was introduced a fortnight ago, scores of firms across the country have reported difficulties accessing it.
It is not surprising that there have been teething issues at this point. Government ministers have been working around the clock to deliver financial packages that would normally take months of careful planning to bring to fruition.
But with scores of businesses trying to work out how to cover costs in the short-term, time is of the essence when it comes to accessing finance.
That is why the Treasury today (April 3) updated its guidance in terms of which businesses are entitled to the funding.
According to information published today by the British Business Bank, which operates the CBILS on behalf of the Government, “insufficient security is no longer a condition to access the scheme.”
It is thought that this clarification will significantly increase the number of businesses eligible for the scheme and speed up the process of getting cash to the firms that need it most.
The CBILS is being delivered through the commercial banking system, which means NatWest, Santander, Lloyds, HSBC and all the other high street lenders are responsible for financing struggling businesses.
Hitherto, banks had been advised that the CBILS was only to be offered to firms that would not ordinarily be eligible for a commercial bank loan. In the case of a business that is eligible for an ordinary loan, the bank had to offer ordinary lending, rather than the CBILS.
Chris McCourt, corporate finance partner at accountancy, financial and business advice firm, Armstrong Watson explains the implications of the most recent Government announcements.
He said: “Previously, the scheme was only available when there wasn’t sufficient security to enable another form of lending. So, the business couldn’t get a commercial mortgage another kind of secured finance for example.
“Basically, they’ve taken that requirement away.”
Making insufficient security a condition of the scheme created a situation where many banks were only offering their own financial products to businesses, rather than the Government-backed scheme.
The condition also meant that one business could have no problem extending their overdraft or opening a new loan facility and another could be asked to provide personal guarantees up to the full amount of the loan being taken out.
The use of personal guarantees, which is where a bank asks a business owner to offer their personal assets as a security against non-repayment, were also addressed in the updated guidance today.
Under the new guidelines, no personal guarantee will be required for CBILS loans up to £250,000 and for loans greater than that amount, a personal guarantee will only be necessary 20 per cent of the facility, with the Government liable for the remaining 80 per cent.
Banks had been coming under fire for not acting quickly enough to provide finance to businesses through the CBILS. This was primarily because Government advice had been to only offer it to those with insufficient security for ordinary lending. It is no surprise that the process had been chaotic.
Chris adds: “Banks are not in the business of taking equity risk. They’re in the business of lending money and getting it paid back.”
As this situation develops, the advice coming out of accountancy firms like Armstrong Watson is to think short, medium and long term about what the impact of COVID-19 is going to be on your business.
Chris says: “For a lot of SMEs, the key thing the banks are looking for is, have you taken all the actions we would reasonably expect you to take? Have you reviewed your workforce and worked out what employees you can furlough and take advantage of that scheme? Have you managed your short-term cash flow to the best extent you can? Have you worked out what you need in terms of financial support to be able to trade through this situation?”
It is also important to speak to your existing lender first when think about applying for a loan through the CBILS.
Chris explains: “Firstly, because they know your business best and are most likely to understand assumptions you’re making around future trading and viability. Secondly, because the banks are swamped – they got 30,000 applications in the first week and will be prioritising their customers first.”
Banks are also most likely to process the requests of existing customers most quickly, which is particularly important given that businesses are facing cash-flow issues now.
The CBILS is just one aspect of Government support available to businesses and what’s clear is that businesses should look at their continuity plans and future income projections before deciding which schemes to apply for.
Disclaimer: The information provided in this article was accurate as of 5pm, April 3.