With the UK as a whole being ordered to lockdown in an attempt to limit the damage caused by the coronavirus pandemic, many businesses have been ordered to shut, or have been forced to shut due to being considered ‘non-essential’ in the current climate.
The Coronavirus Business Interruption Loan Scheme (CBILS) was one of the key measures announced by the Chancellor of the Exchequer as a way to help small and medium-sized businesses cope with the severe financial impact of the virus. CBILS has been organised by the government-owned British Business Bank.
This organisation has been coordinating banks and lenders across the UK so that they are able to provide lending of up to £5 million for small businesses facing serious financial difficulty over the coming months. This will potentially help SMEs who are unable to get a commercial loan because they don’t meet the normal lending requirements at this time.
Who Is Eligible?
Whilst the lending products included in the scheme are more freely available to businesses than traditional loans, there is still strict criteria that must be met in order to apply. To be eligible for CBILS, an SME must:
- Be UK based
- Have an annual turnover of no more than £45 million
- Generate more than 50% of its annual income from trading activity
- Guarantee that this facility is used only to support trading in the UK
- Have a borrowing proposal that would be considered viable by the lender outside of the current pandemic, and which the lender believes will suffice to pull the business out of their current difficulties.
What Are The Exclusions?
There are still exclusions to the scheme, meaning that certain businesses and industries will not be considered for a loan. These include:
- Banks and building societies
- Businesses in the public sector
- State-funded schools
- Religious and political organisations
Fishing, aquaculture and agriculture businesses may apply, but may not qualify for the full interest free and fee levy in the first 12 months.
How CBILS Works
British Business Bank runs and operates the scheme through its accredited lenders. At the time of writing there are more than 40 of these, and the list keeps getting longer as more institutions apply to join. The types of lenders that are currently part of the scheme include:
- High street banks
- Challenger banks
- Asset-based banks
- Specialist local lenders
Up to £5 million can be offered in lending to businesses who make a successful application, via a range of financial products which include:
- Term loans
- Invoice finance
- Asset finance
Whilst the government provides a guarantee for up to 80% of the debt, the borrower is still liable for the full debt repayment.
For businesses trying to weigh up the pros and cons of taking out a loan under this scheme, the uncertain nature of the financial and businesses world over the next year or so can make this difficult. In this case it is worth looking at the benefits and disadvantages of taking part in the scheme. Some of the things that could be considered advantageous for businesses in the current climate are:
Up To £5m Facility
For businesses who are unsure how to keep their business afloat in the current climate, the ability to borrow up to £5 million gives them a hefty amount of finance to work with. Not only this, but the repayment terms are up to six years, giving businesses time to pay back what they have borrowed after their company has gone back to normal.
The government has promised a partial guarantee of 80% against the outstanding facility balance if the business is unable to pay it back after the Coronavirus pandemic ends. This offers both lenders and borrowers with a little more confidence in using the scheme, as even if the business is forced to fold in the long run, the lender will not face a total loss on the loan.
Limited Fees And Interest
There is no guarantee fee for SMEs who want to take part in the scheme, and lenders pay a fee in order to access the scheme, placing the power firmly with the borrower. The government has also promised to pay interest and fees for 12 months to cover any lender-levied fees, meaning that businesses benefit from no upfront costs and lower initial repayments.
Whilst there can be no doubt that, for formerly thriving businesses struck down due to the pandemic, the Coronavirus Business Interruption Scheme offers a ray of hope, there are still downsides that must be addressed.
Loans over £250,000 may require personal guarantees from the company’s officers. This cannot be someone’s primary residence, but apart from that proviso all an individual’s assets may be covered under a personal guarantee.
This is one of the most contentious elements of the schemes and it is feasible that the Government may further narrow borrowers’ ability to demand them.
Start-Ups Unfairly Discriminated Against
Some start-ups and entrepreneurs have argued that the scheme unfairly discriminates against smaller companies, who are still not making significant profits. Because lenders look at profits when deciding whether or not a business is viable, small companies who are focusing on scaling-up rather than profits are likely to be turned down.
The Federation of Small Businesses have said that many banks seem “overwhelmed” by the scheme, with National Chairman Mike Cherry saying: “No-one could question the ambition of the Treasury’s new interruption loan scheme – the underwriting of commercial lending on this scale has never been seen before.
“Feedback from members last week indicated that at least a few banks are overwhelmed, and struggling to get across the fine print of this fresh scheme, meaning customer service is suffering.”
Whilst the scheme was unveiled in an attempt to ease the financial pressures placed on businesses by the pandemic, some have accused banks and lenders of taking advantage of the recent surge in demand for emergency loans, by raising their interest rates.
Labour MP Chris Bryant said: “The base rate at the Bank of England is now 0.1% but … banks like Barclays are charging anything between 7% and 12%.”
According to Bryant, with the government guarantee ensuring that banks are unlikely to suffer should businesses struggle to pay back their loans, fair interest rates would be closer to 1%-4%. “They’re taking minimal risks and charging exorbitant rates. It looks like profiteering to me,” he said.
If you as a company owner are considering applying for one of these loans then it maybe worth asking an accountant to give you an appraisal of your company’s finances. This makes sense given the fact that taking out a loan which may involve personal guarantees is a decision that, if pursued, comes with very considerable strings attached that may leave you financially very exposed.
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