"Based on what we know so far, and feedback we have received from contacts across the market, we have summarised the headlines of the CBILS, along with some of our own practical views on how to best access this and put your best foot forward as an SME".
The Coronavirus Business Interruption Loan Scheme (CBILS)
The CBILS was officially launched on Monday 23 March, and is designed to support SMEs with access to loans, overdrafts, invoice finance and overdrafts of up to £5 million and for 6 years. Overridingly, it is to support SMEs who are experiencing lost or deferred revenues, leading to disruptions to their cashflow. For these purposes, an SME is a business which has a turnover of no more than £45 million. It will initially run for 6 months and the scheme will be delivered through a panel of commercial lenders, backed by the government owned British Business Bank (BBB). The list of 40 accredited providers can be accessed through the BBB website here. The CBILS provides the lender with a government backed partial guarantee of 80% on each loan in the event the loan is not repaid or recovered by security provided by the borrower (subject to a per-lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs. The government will make a Business Interruption Payment to cover the first 12 months of interest payment and lender levied fees, if any, so SMEs will benefit from reduced costs and lower repayments. At the discretion of the scheme lender, the CBILS may be used for unsecured lending for facilities of £250,000 and under. For facilities above £250,000, the scheme lender must establish a lack or absence of security prior to businesses using the CBILS. Primary Residential Property (PPR) cannot be taken as security under the CBILS but personal guarantees or charges over other personal assets (such as other property) has not been excluded.
Crucially, it was also announced this week that the BBB is accelerating accreditation for existing lenders to be able to provide variants of the CBILS, and are accepting applications for new lenders to undergo accreditation. We see this as a positive step as it will create further choice and reduce the burden on an already small pool of lenders and open the market to specialist lenders with underwriting capacity and small business expertise.
On the face of it, the CBILS is a highly attractive scheme however, there are a number of points that should be considered by businesses of any size before making an application:
The CBILS replaces the Enterprise Finance Guarantee (EFG). The EFG was not widely used by SMEs and largely considered as inaccessible by businesses and subject to excessively strict criteria. It is anticipated the CBILS will provide more attractive terms for both borrowers and lenders.
In the first instance, businesses should approach their clearing bank, not via the BBB. If the loan provider can provide the loan on normal commercial terms without making use of the CBILS, they will.
Any eligibility decision has been fully delegated to the scheme lender. Get in touch with the businesses Relationship Manager (where possible) and inform them that an application is forthcoming.
Businesses will need to have a borrowing proposal that would have been considered viable by a lender prior to Covid-19.
The lender will need to see that the provision of new finance will enable your business to trade out of any short-medium term challenges.
Lenders are short-staffed and mostly working remotely which brings its own challenges for them. This scheme is new and the relationship and lending managers are not yet familiar with the criteria. Businesses should allow at least 3 weeks for an application to be reviewed and in reality we expect this to be longer.
At a very minimum, an application should include the usual information a business would provide in support of a loan application. This should include:
Cashflow statement showing the impact of Covid-19 over the next 6 months and a detailed breakdown of your assumptions
A full business plan and borrowing proposal
Last 3-years statutory accounts
Latest management accounts – full P&L and balance sheet
Information on how the business has taken steps to reduce its fixed costs e.g. employment, use of other government support schemes, rent, etc
Where possible, outline the defensibility of the business model. Businesses should make it clear that post Covid-19 they still have a structurally sound model that is capable of servicing the loan interest and capital repayments
Be conservative with your assumptions and allow for at least 6 months of business interruption
The requirement for a personal guarantee (PG) from the Directors for loans of up to £250,000 has been removed as of this week
Individual lenders will have their own specific criteria and we strongly recommend speaking with the business relationship manager first to get a full picture
Based on the information we have received to date on the CBILS we expect further variations to the scheme in the coming weeks and for a number of the criteria to be amended. As it stands, the current eligibility criteria is likely to exclude a large number of the businesses it is intended for and render the scheme too subjective.
Sources: Financial Times, Farrer, HMRC, British Business Bank