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The Coronavirus Business Interruption Loan Scheme (CBILS) – New Figures Released

On 24 April 2020 UK Finance released the first of its weekly updates regarding the CBILS scheme. In this updated blog post we have a look at these figures, how the scheme has operated to date and some possible changes to come.

CBILS is a new scheme that can provide facilities of up to £5m for smaller businesses across the UK who are experiencing lost or deferred revenues, leading to disruptions to their cashflow as a result of Covid-19.

CBILS is intended to support a wide range of business finance products, including term loans, overdrafts, invoice finance and asset finance facilities.

The scheme provides the lender with a government-backed guarantee against the outstanding balance of the facility. Understanding the nature of this guarantee is very important. The lender will only be able to rely upon the government guarantee once it has sought recovery from the borrower and any third party guaranteeing the borrower’s financial obligations under the CBILS facility.

CBILS is available through the British Business Bank’s accredited lenders, which are listed on the British Business Bank website.

In the first instance, businesses should approach their own provider – ideally via the lender’s website or via their relationship manager. They may also consider approaching other lenders if they are unable to access the finance they need.

  • The key features of the scheme can be summarised as follows:
  • The maximum value of a facility provided under the scheme is £5 million, available on repayment terms of up to six years.
  • The borrowing limit is based on either 25% of the borrower’s 2019 turnover or double their annual wage bill.
  • The scheme provides the lender with a government-backed, partial guarantee against the outstanding balance of the finance. The borrower remains 100% liable for the debt.
  • The government will make a business interruption payment to cover the first 12 months of interest payments and any lender charges such as arrangement fees.

The scheme intended for companies with turnovers of less than £45m although an extension to the scheme has been set up for businesses with turnover in excess of this whereby they can access funding of up to £50m backed by the limited government guarantee.

What about personal guarantees?

Under the scheme, lenders should not take personal guarantees of any form for facilities below £250,000.

For facilities above £250,000, personal guarantees may still be required, at the lender’s discretion, but:

  • They must exclude the guarantor’s principle private residence (i.e. their home); and
  • recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied.

The provision of personal guarantees has been a particularly controversial aspect of the scheme. The prohibition of the guarantee requirement for loans under £250,000 is a more recent development introduced by the chancellor. Although some banks were voluntarily following this practice before it became mandatory.

What about businesses who were struggling before Covid-19?

It is worth pointing out that this scheme is designed to assist companies experiencing financial pressure and business interruption as a result of Covid-19. Applicants must show in their loan applications that were it not for the current pandemic their business was viable.

Despite this we understand that some successful and profitable businesses struggling with cash flow as a result of business interruption have been turned down for these facilities.

Comparisons with the Enterprise Finance Guarantee Scheme (EFG) and the possibility of mis-selling

CBILS does bear a somewhat striking resemblance to the EFG loan scheme which was introduced to assist bank lending to SMEs in the wake of the previous financial crisis. This scheme was also based around a government guarantee in order to encourage the banks to make funds available to customers facing financial pressure caused by a downturn.

CBILS is different from the EFG scheme in a number of ways:

  • There is no guarantee fee for SMEs to use CBILS. Under EFG, the borrower paid a guarantee fee.
  • The government will make a Business Interruption Payment to cover the interest and any lender-levied fees in the first 12 months of any CBILS facility. This means smaller businesses will benefit from no upfront costs and lower initial repayments.
  • The maximum facility provided under CBILS will be up to £5 million. Under EFG, this was £1.2 million.
  • Under the scheme, lenders will not take personal guarantees of any form for facilities below £250,000. For facilities above £250,000, personal guarantees may still be required, at a lender’s discretion and subject to the restrictions set out above.

There was widespread mis-selling of EFG loans by a number of banks on the basis that borrowers were told they would only be liable for the 20% of outstanding borrowings not covered by the government guarantee. Some even put uncapped personal guarantees in place on the basis of this misunderstanding resulting in banks being able to shore up their recovery positions by way of having the comfort of both personal and government guarantees.

While there is potentially scope for the same sort of misrepresentations to be made again here, the fact that the CBILS scheme appears to be oversubscribed means that the banks, if anything, will be trying to defer the processing of these loans or pushing customers towards alternative products.

Any borrower seeking to take out a CBILS facility should take steps to ensure that they understand how the government guarantee operates and the extent of any personal liability they will have if a personal guarantee is required by their lender and their company defaults.

How is this working in practice?

Approaches have varied in the early days between lenders and there has been reported confusion between what is the official government policy and what is a bank’s own policy.

The heads of the main clearing banks have all expressed their 100% commitment to the scheme. However there seems to be a time lag in terms of the policy and commitment trickling down to individual relationship managers and their teams.

Its helpful to have a look at the figures released by UK finance yesterday (23 April 2020):

  • 40 Accredited Lenders
  • 300,000 Enquiries
  • 36,000 Applications
  • 16,600 applications approved (120% increase from 14 -21 April)
  • £2.8 billion lent (100% increase from 14 -21 April)
  • Average Loan Value £185,000

Despite this increase in loans being approved some profitable and solvent businesses have been turned down or told their banks can’t/won’t help. This is not what either the government or the banks’ policy makers intended. The application process has been described as soul destroying by at least one director seeking to utilise the scheme.

At present there appears to be a bottleneck caused by a combination of the following:

  • A high volume of enquiries while banks are stilling getting used to new working arrangements.
  • Credit committee approvals still being required on the basis that even with the government guarantee, there is still a significant risk to the bank with a 20% shortfall.
  • Triaging – Bank’s are considering applications submitted by existing customers first. Followed by customers who use a combination of banks and then finally new customers.
  • Banks having to consider state aid regulations as part of the application process.

The progress in the last week would appear to suggest that this bottleneck may be opening up. The position is changing daily and businesses who have been turned down should ask again, reapply or approach other lenders. Challenger banks, who are using technology to quicken loan application processes, should be considered but the prioritising of existing customers should be kept in mind.

Scope for further changes to the scheme

Peer and consumer pressure also seem to be having a positive effect. For instance, some of the bank’s voluntarily loosened their personal guarantee requirements before being told to do so by the government.

There have also now been repeated calls for the treasury to underwrite 100%. This having been done in both Germany and Switzerland to speed up the process. This call looks like it might be in part responded to by the chancellor who is expected to announce that 100% state backed loans, up to the value of £25,000, will be made available to “micro-SMEs” struggling to obtain credit.

More changes to the scheme are expected to be announced shortly.

This blog post was prepared on 24 April 2020. This is clearly a fast-moving field and we are seeing updates to the scheme and receiving feedback from borrowers on an almost daily basis. We will endeavour to update this blog when significant changes are announced. If you have any questions regarding the scheme or are having difficulties with your lender, please do not hesitate to get in touch with a member of the dispute resolution team.

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