Coronavirus Business Interruption Loan Scheme 2.0: “The Overhaul”

Written on 3 Apr 2020

Amid concerns that SMEs were being denied access to the Coronavirus Business Interruption Loan Scheme and that a 'squeezed middle' were being left out of the emergency funding measures altogether, the Chancellor, Rishi Sunak, has announced measures aimed at speeding up decision making within banks and expanding the reach of the scheme to ensure that UK businesses can access the emergency funding they need.

What is CBILS?

The temporary Coronavirus Business Interruption Loan Scheme ("CBILS") is part of a wider package of government support for UK businesses and employees during the COVID-19 outbreak. CBILS seeks to provide financial support to smaller businesses across the UK that are feeling the impact of the COVID-19 outbreak on their revenue and cash flows.

How does it work?

The British Business Bank operates CBILS through its accredited lenders. There are over 40 accredited lenders that are able to offer the scheme, including: high street banks, challenger banks, asset-based lenders and smaller specialist local lenders.
To encourage more lending, CBILS provides lenders with an 80% government- backed partial guarantee against the outstanding facility balance, subject to an overall portfolio cap. The guarantee will help businesses that may otherwise have been denied credit. As the CBILS guarantee is to the lender, SMEs remain 100% liable for the debt.

What are the key features of the scheme?

A lender can provide finance in the form of term loans, overdrafts, invoice finance or asset finance.

Term and amounts

The maximum value of a facility provided under the scheme is £5million. Term loans and asset finance are available on repayment terms of up to six years and overdrafts and invoice finance facilities terms will be up to three years.

Fees and interest

The government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees, so SMEs will benefit from no upfront costs and lower initial repayments. The exception to this is that fisheries, aquaculture and agriculture businesses may not qualify for the full interest and fee payment.

Eligibility

To be eligible for a facility under CBILS, an SME must:

  • be UK-based in its business activity with an annual turnover of no more than £45million;
  • have a borrowing proposal which the lender would consider viable, were it not for the current pandemic; and
  • self-certify that it has been adversely impacted by COVID-19.

SMEs from all sectors can apply, with some exceptions (including banks, insurers, reinsurers and other exceptions which are set out in detail on the British Business Bank website).

Decision-making on whether SMEs are eligible for CBILS is delegated to the 40 + accredited CBILS lenders.

What changes has the Chancellor made?

Under the new terms announced by Rishi Sunak today (3 April 2020):

  • The requirement for accredited lenders to first assess whether SMEs are eligible for their other commercial lending options has been removed. This change aims to speed up the credit committee decision process, which until now has meant borrowers have been told they may need to wait weeks for a decision. It is also designed to prevent accredited lenders insisting that businesses use standard commercial loan facilities (which do not have the crucial benefit of the 12 month interest free period) instead of CBILS. Access to a CBILS loan should be available to any eligible borrower. But to be eligible, SMEs will still need to have a borrowing proposal which, were it not for the COVID-19 pandemic, would be considered viable by the lender.
  • Accredited lenders will not be permitted to request any form of personal guarantee for facilities below £250,000 (several high street banks had already announced that they wouldn't do this). For facilities above £250,000, personal guarantees may still be required at the lender's discretion but must be limited to the non-government backed 20% of the outstanding debt. Principal Private Residences may not be taken as security in any way for a CBILS loan.
  • The new Coronavirus Large Business Interruption Loan Scheme (CLBILS) will provide a government guarantee of 80% to enable banks to make loans of up to £25 million to firms with an annual turnover of between £45 million and £500 million.

Has the Chancellor done enough to quell the growing tide of criticism?

The amendments to the existing CBIL scheme certainly go some way to dealing with the main criticisms made by business leaders and lobbying bodies, but the real test will be seen over the coming days and weeks as we wait to see how accredited lenders cope with the inevitable avalanche of applications. We know that our client banks are working hard to put systems in place to deal with a high level of demand and process applications as quickly as possible. But most lenders are focussing on processing applications from existing customers, rather than new business. We also understand that lenders' general preference is to make any loan under the scheme to the parent company in a group, rather than to a subsidiary, although more than one company in a group may be eligible if the consolidated annual turnover is under £45m. The amended scheme will be operational from Monday 6 April 2020.

As to whether these changes are enough, the concerns we raised in our earlier Insight about the significant chunk of UK PLC that are too big for CBILS but do not possess the investment grade requirements of the Covid-19 Corporate Financing Facility, have been eased by the new CLBIL Scheme. We are pleased to hear that the representations that we, and many other firms and business leaders, have made on behalf of our clients seeking access to emergency funding for this crucial part of the UK economy have been taken on board by the government. We await further details of the new scheme and a clear time frame, and look forward to working closely with our borrower and lender clients to ensure that this funding support reaches those businesses in need.