In response to concerns raised by the business community since the Coronavirus Business Interruption Loan Scheme was launched, the Chancellor has extended the scheme so that all viable small businesses affected by COVID-19, and not just those unable to secure regular commercial financing, will now be eligible. Insufficient security is no longer a condition to access the scheme.
Please note that as of 24 September 2020, the Chancellor of the Exchequer announced the Coronavirus Business Interruption Loan Scheme (CBILS) will be extended until 30 November 2020.
The Chancellor is hoping that by doing this he will significantly increase the number of businesses eligible for the scheme. The expanded scheme will be operational with lenders from Monday 6 April 2020. Importantly, the government has indicated that these changes should be retrospectively applied by lenders for any CBILS facilities offered since 23 March 2020. For any commercial (non-CBILS) facilities offered since the same date, providing the borrower meets the CBILS eligibility, lenders have been asked to bring these facilities onto CBILS wherever possible.
What is CBILS?
CBILS is a new government backed scheme which can provide facilities of up to £5m for smaller businesses across the UK who are experiencing trading difficulties due to the current Coronavirus pandemic. CBILS provides the lender with a government-backed guarantee to assist lenders in making loans to businesses where previously they may have refused to do so.
Please note that the borrower still remains 100% liable for the debt.
CBILS is available through the British Business Bank’s 100+ accredited lenders which are listed on the British Business Bank website. They include:
- high-street banks;
- challenger banks;
- asset-based lenders; and
- smaller specialist local lenders.
CBILS can be used to support a wide range of business finance facilities, including:
- term loans;
- asset finance; and
- invoice finance,
but please note that not every lender will be able to offer each type of finance.
What are the key terms of CBILS
The key terms of CBILS are:
- The maximum value of a facility provided under the scheme will be £5m;
- The scheme provides the lender with a government-backed guarantee of 80% of the debt advanced by the lender;
- There is no guarantee fee for smaller businesses;
- The government will cover the first 12 months of interest payments and any lender-levied fees;
- 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;
- At the discretion of each 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 a lack or absence of security prior to businesses using CBILS;
- For all facilities, including those over £250,000 CBILS can now support SME’s even when the lender considers there to be sufficient security, making even more businesses eligible for the payment;
- No personal guarantees in any form on facilities under £250,000;
- Personal guarantees may still be sought for lending over £250,000 however; these cannot be secured against a principal private residence (PPR) and recovery is capped at 20% of the outstanding balance of the facility once business assets have been applied.
Please note that if the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will do so.
Is my business eligible for CBILS?
In order to be eligible for CBILS, your business must:
- be based in the UK in its business activity;
- have an annual turnover of not more than £45m;
- not operate in an excluded sector (banks, building societies, insurers and reinsurers (but not insurance brokers), the public sector including state funded primary and secondary schools; employer, professional, religious or political membership organisation or trade unions);
- have a viable borrowing proposal which would have been considered favourably by your lender were it not for the current pandemic;
- self-certify that it has been adversely impacted by the Coronavirus (COVID-19); and
- not be classified as a ‘business in difficulty’ on 31 December 2019 if facility required is in excess of £30,000.
From 25 September 2020 businesses applying for CBILS will benefit from more flexibility on the date the test of whether or not their business is an ‘undertaking in difficulty’ is assessed.
To be eligible for these schemes, businesses previously had to demonstrate that they were not an ‘undertaking in difficulty’ – a requirement under EU State aid law – as of 31 December 2019.
The definition of ‘undertaking in difficulty’ includes businesses that:
- had accumulated losses greater than half of their subscribed share capital (for limited liability companies) or capital (for unlimited liability companies)
- had entered into collective insolvency proceedings or fulfilled the criteria to be put into collective insolvency proceedings
- had previously received rescue aid that was yet to be reimbursed or (in the case of a guarantee, terminated)
- had received restructuring aid and were still under a restructuring plan
had (where the undertaking is not an SME) fallen below the required solvency ratios (see further below) for the previous two years.
The new guidance allows for the ‘undertaking in difficulty’ assessment to be determined at the date of application for the schemes. Businesses that were ‘undertakings in difficulty’ on 31 December 2019 but are no longer ‘undertakings in difficulty’ will now be (in principle) eligible for the schemes.
This flexibility means that businesses can take action to convert their debt (for example, in the form of loan notes) to shares (equity) in order to qualify for the schemes, giving them the option to restructure their finances before application so they may become eligible.
Further guidance and support for businesses during the pandemic can be found on the Business Finance Guide website.
How do I apply?
You should approach your own bank/lender, preferably via its website. However, you can approach other lenders if your own bank refuses to assist you. Please note that in all probability the first question you will then need to answer is why is your current lender not supporting you!
Decision-making on whether you are eligible for CBILS is fully delegated to the 40+ accredited CBILS lenders. You can find the CBILS SME checklist here.
What else should I consider before I apply?
- You (the borrower) will remain 100% liable for the debt irrespective of the government guarantee. How will you repay this debt and your businesses existing debts is still a key question which you will need to answer!
- The guarantee is provided to the lender and not the business. If an event of default occurs, the lender will call on the business, and not the government, to repay the borrowing. This has led to certain banks/lenders requiring the directors of a business to provide personal guarantees for 100% of the CBIL debt, especially where the businesses cannot provide new and additional security to the lender;
- Is your business subject to any restrictions on borrowing? These restrictions may be in your constitutional documents of your business or may be set out in your existing commercial or banking documentation;
- Is your business currently solvent on a balance sheet (do your assets exceed your liabilities) and on a cash flow basis (can you pay your debts as they fall due)?
- What does your financial modelling tell you about how much debt the business can borrow and repay? Will you need to amend any of your existing financial covenants?
If you would like to discuss anything contained in this blog please email James McNeil in the first instance.
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