Not all the CBILS Lenders have fully formed offerings at this point, the situation is fluid and the following are subject to change.
The Coronavirus Business Interruption Loan Scheme (CBILS) is now available through participating Lenders
That’s the headline from the British Business Bank – but what is it and will it really help?
Firstly, it’s not a pot of gold from the Government being distributed to businesses to enable them to weather the storm of Coronavirus.
If a CBILS loan is agreed, by one of the Lenders in the scheme:
- the Government undertakes to pay the first 12 months interest
- the Government will pay the initial fees
- if the business fails, the Government “guarantees” to pay 80% of any loss the Lender incurs after their usual recovery processes.
This guarantee is provided free of charge, typically a similar guarantee under the now suspended EFG cost 2% p.a.
An application for a CBILS loan must be made to a scheme Lender https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils/accredited-lenders/, not all Lenders participate in the scheme. This could be challenging for borrowers with non-participating Lenders, as agreeing a facility which requires security to be split between Lenders will be challenging, as will transferring the whole Bank relationship to a participating Lender. Even if agreed it’s not going to be a quick process.
When extending a CBILS facility to a limited company most Lenders will ask for a Directors Personal Guarantee, possibly for the full amount of the loan, a couple of Lenders we have spoken to have said they may not seek PG’s on all occasions, but our guess is that this will be exceptional.
The Lenders will apply their own lending criteria. We understand that the maximum loan might be limited to a proportion of last year’s turnover or related to the annual wage costs. A view might be taken that the loan is limited to an amount of debt that could be repaid over max term of 6 years, based on the free cash generated over the past few years.
Over the years we have known many steady lifestyle businesses continue year on year quite satisfactorily that do not generate much in the way of free cash to repay debt. Through a three-month downturn and say a three-month recovery these businesses could accrue a substantial funding need that Lenders could find difficult to step in and fill.
Understandably, the Borrower will be required to provide financial forecasts but frankly who knows how long Coronavirus will affect the economy before we see a recovery, or how long the recovery will take. It’s all very uncertain, but to participate in the scheme Directors are being asked to put their Guarantees on the line – that’s quite a commitment to make.
Sterling Capital Reserve will support its Clients to help prepare Proposals/Business Plans and produce Financial Forecasts to support applications under the CBILS scheme and we also have contacts with Alternative Funders if the existing Bank is unable to help – but note these Lenders will almost certainly be looking for Director’s Guarantees.
The Government has moved very quickly to announce support for businesses but, as the detail emerges, it appears it may not be the solution that many SME’s had hoped for.