In depth

An update to the Coronavirus Business Interruption Loan Scheme

The Coronavirus Business Interruption Loan Scheme (CBILS) was introduced by the government on 23 March as part of its initial wave of measures to support the UK’s smaller businesses through the Covid-19 pandemic.

It has subsequently been further expanded on 3 April to address criticisms of the initial scheme and to widen the range of businesses who can access it. In this article we look at what support is available, who it is available to, its terms and how it can be accessed.

What is CBILS?

The scheme (which is organised by the British Business Bank (BBB)) will run for 6 months from 23 March 2020, although it may be extended.

Under CBILS, a loan made by a lender will benefit from a government backed guarantee in respect of 80% of a lender’s post- recovery losses following a borrower default. In addition, lenders are not to charge SME borrowers a guarantee fee and the government will make a further business interruption payment to cover the first 12 months of interest payments and any fees payable to the relevant lender in respect of a facility made under CBILS, minimising any initial impact of the financing on cashflow.
It should be noted the borrower remains liable for the full debt under a CBILS loan, with the government’s guarantee only to be called where the borrower has failed to pay such amounts (and such amounts could not be recovered from the borrower’s assets). 

Who is CBILS for?

A borrower’s business activity must be UK based, with a turnover of not more than £45m (calculated on a consolidated group basis) - see our note on the Coronavirus Large Business Interruption Loan Scheme (CLBILS) where turnover exceeds £45m.

There must be a clear borrowing proposal that would have been viable had it not been for the impact of Covid-19. The proposal also needs to show that the business will be able to trade out the short to medium term difficulty with the help of the finance. 
To be eligible, a business must have been adversely impacted by Covid-19 and, if seeking to borrow £30,000 or more, it must not have been a ‘business in difficulty' on 31 December 2019.

CBILS facilities can be made to bodies corporate, sole traders, partner(s) in a partnership, freelancers, limited liability partnerships, limited partnerships and any other legal entity which, in each case, operate through a business account and generate more than 50% of their turnover from trading activities. Banks, insurers and reinsurers (other than insurance brokers), public sector bodies, grant funded further educational establishments and state funded primary and secondary schools are however not eligible.

Determining a business’ eligibility is the responsibility of each individual accredited lender.  In practice, lenders are unlikely to be lending to businesses that would not have met the requirements of their credit policy prior to the current crisis – i.e. those that are in a credit grey area as a result of the current situation. This is the type of businesses the assistance seems to be aimed at.

Where a borrower is refused a facility, it may apply to other lenders.

What is a ‘business in difficulty’?

A business would be a ‘business in difficulty’ (and so ineligible for the scheme) if, as at 31 December 2019, it had:

  • accumulated losses of more than half of its subscribed share capital (save where the business had existed for less than 3 years at that date);
  • started, or fulfilled the criteria to be put into, certain types of  insolvency proceedings;
  • previously received rescue aid that has not been reimbursed (or, in the case of a guarantee, terminated);
  • received restructuring aid, and was still under a restructuring plan; or
  • a book debt to equity ratio which was greater than 7.5 and an EBITDA interest coverage ratio which was below 1.0 for the two years preceding 31 December 2019 (in circumstances where it has 250 or more employees only).

Would we still be eligible even if we are owned by a private equity investor?

The BBB have confirmed that companies with private equity investors are eligible for CBILS provided that the other requirements are met. When assessing eligibility, the £45m turnover threshold will exclude the private equity investor and its investment portfolio.

The funding of private equity investments through loan notes and other debt instruments, rather than by way of share capital, may however result in them technically being a ‘business in difficulty’ (as detailed above) due to their debt to equity ratio, in which case they could not access CBILS. It is noted that the BVCA are making ongoing representations to the government to seek to address this issue and further updates are available from the BVCA’s website. 

How much can I borrow?

The maximum facility size under CBILS is £5m, although the actual facility available to a borrower will be dependent on the borrower’s specific circumstances, their needs and their ability to repay and service the loan, as well as the policies and appetite of the lender.

Lenders will have a specific limit of the funds available for making CBILS loans and will likely have made internal policy decisions about how they wish to utilise it. If you are able to have a relationship discussion with your existing lender you may gain further insight into this.  For example, are they more likely to advance multiple smaller term loans or fewer larger loans?

What type of facilities are available with CBILS?

Term loan facilities, revolving credit facilities (such as overdrafts), invoice finance facilities and asset finance facilities can be made available through CBILS. There does, of course, need to be accredited lenders for these different facility types. Not all lenders will offer all facility types.

The facilities can be for as short a period as three months or as long as six years in the case of term loans and asset finance facilities or three years in the case of revolving facilities and invoice finance facilities.  It seems likely that the majority will fall somewhere in between and will depend on a number of factors, including the type of facility, the business needs (how has its sector been affected and when is recovery likely), the level of risk and the policies of the relevant lender. 

Which lenders are 'accredited' CBILS lenders?

The BBB website maintains a list of  accredited lenders, which includes many of our high street banks as well as challenger banks, asset based lenders and specialist local lenders. It should be noted that not all lenders  are accredited for all types of facility. Again, the BBB website includes details as to which lenders are providing each type of facility.

A lender is less likely to be able to offer facilities where they do not have an existing credit policy for that type of product. So if your lender didn't offer invoice discounting in the past, they are unlikely to be doing so for CBILS.   Even if they did, however, you can expect differences in pricing and approach (for example, they may fund against older debts than they would have in the past).

You do not have to use your current lender but, provided they offer the type of facility you need, you are likely to find that if you do so matters can be progressed more quickly as they will already have a lot of information about you and your business and may also have existing security over the key assets of the business.  If security is taken over assets that can't, from a practical perspective, be readily valued just now that existing knowledge and relationship of trust can be key.

It's worth looking around however as some may offer better terms for what you need and experience with CBILS to date shows that some of the accredited funders are able to respond to applications and make funds available to businesses quicker than others.

Will i need to give a personal guarantee?

Personal guarantees will not now be taken for loans of £250,000 or less.

You may be requested to provide personal guarantees for loans of £250,000 or more however these will be capped at 20% of losses after all other recoveries from the business have been applied. 

Are you required to have insufficient security to access CBILS?

Originally, a borrower could only access CBILS where a lender considered there to be insufficient security from the borrower to otherwise support lending to the borrower. This requirement was removed with effect from 6 April, meaning that borrowers can now access CBILS (and receive the benefit of the government’s business interruption payment) even where sufficient security is available.  

Where a borrower has sufficient assets, security is likely to be required by a lender. Security can also be required from third parties, such as directors, to support personal guarantees given by them. In each case, security cannot now be taken over a principal private residence to support a CBILS facility.

What will the paperwork look like?

There is no standard set of documents from the BBB so, as for any type of loan, this will vary from lender to lender and likely be impacted by the size of the loan.  

You can expect to see representations about the information in the viability proposal along with fairly stringent ongoing information requirements and restrictions on taking cash out of the business as lenders keep a close eye on the financial position of the business going forward as the lockdown situation develops.

Most banks will use their own form of document adapted to cover some of the necessary elements of CBILS.  Where a lender previously participated in the Enterprise Finance Guarantee (EFG) scheme the CBILS paperwork is likely to be very similar with perhaps just an addendum to reflect CBILS requirements. These lenders are also most likely to be quick off the mark as much of the groundwork on credit approvals and document production will already have been done for the EFG scheme and can be adapted accordingly.

Lenders are unlikely to be willing to negotiate or amend documents in any significant way, not least to avoid the need to incur additional legal costs on each transaction. It is important to review and understand the terms and decide whether or not you can accept them. 

What should be considered when applying for a CBILS loan?

  • Calculate your turnover to check you are accessing the correct scheme.
  • Consider the type of finance most suited to help your business. Check on the BBB website to see which accredited lender provides that type of finance. You are most likely to have success with your current lender and with a facility type you've had before.
  • Compare terms on lender sites and consider who you want to approach first. Lenders are expected to offer a limited range of products and they may not all offer a product that is most appropriate for your business.
  • Pull together a proposal and repayment plan with supporting evidence as to viability (including management accounts, cash flow forecasts, a business plan, historic accounts and details of specific assets).  Check the guidance and ‘frequently asked questions’ on the BBB website as to what a lender will require, and ensure you are being realistic.
  • Approach your preferred provider and find out what else they need from you in order to consider you for a loan and finalise your proposal accordingly. 
  • Have the documentation fully reviewed and explained so you understand the restrictions and requirements you need to comply with and can make an informed decision.