COVID-19: The Coronavirus Business Interruption Loan Program: A Short-Term Solution? | Dentons

Amid the COVID-19 crisis, Chancellor Rishi Sunak announced a new program: the Coronavirus Business Interruption Loan Scheme (CBILS) which aims to help UK small businesses with lost or deferred income resulting in cash flow disruptions , providing access to bank loans, overdrafts, bill financing and asset financing during the pandemic. It opened for applications on March 23, 2020, and to date there has been unprecedented demand. The main provision of the scheme is that it provides the lender with an 80% public guarantee on the outstanding balance of the facility. However, is this only a short term lifeline for SMEs and how will lenders be affected?

Who can apply?

The basic requirements are simple. The applicant must be UK based in their business activity and have an annual turnover not exceeding £ 45million. In addition, the company must:

  • have a loan proposal that the lender would consider viable without the current pandemic; and
  • self-certify that it has been negatively affected by the pandemic.

However, in each case, the decision to lend remains entirely delegated to the lender, and each of the more than 40 accredited lenders will have their own lending criteria and will need more information from each company to confirm their eligibility.

Companies can expect to be asked to provide management accounts, cash flow forecasts, a business plan, historical accounts, and even asset details. This will however depend entirely on the lender and the level of facility requested.

Main features of the scheme

The main features of the plan are just as simple. They are as follows:

  • Value: The maximum value of a facility provided under the program will be £ 5 million, with a maximum repayment term of six years.
  • Guarantee: the lender benefits from a partial guarantee of 80% from the government on the outstanding balance of the facility. There will be an overall limit per lender.
  • Costs: There is no guarantee fee for SMEs to access the program, but lenders will pay a fee to access the program.
  • Interest and fees: The government will make a business interruption payment to cover the first 12 months of interest payments and any charges levied by the lender.
  • Term: For term loans and asset finance facilities, loans will be available for up to six years. For overdrafts and bill financing facilities, the terms will be up to three years.
  • Security: Personal guarantees will not be requested by lenders for installations of £ 250,000 and less. For installations over £ 250,000 personal guarantees may still be required (at the lender’s discretion), but recoveries under these will be capped at a maximum of 20% of the unpaid balance once the proceeds are received. of business assets has been applied. In addition, a private main residence cannot be taken as a guarantee.

The essential feature, however, is that the borrower always remains 100% responsible for the debt.

What this means in practice

The practical effect of the scheme is that small businesses will benefit from no upfront costs and lower upfront reimbursements. In addition, eligible businesses can apply to benefit from the program whether or not they have previously been denied a loan from another finance provider.

For SMEs struggling with cash flow during the pandemic, this is the ideal solution. The objective is to support them throughout this turbulent period, on the assumption that when the economy rebounds, the company will be in a better position to repay the loans under the conditions agreed with the lender.

However, now that the program has been around for a month, a number of questions have been raised as to whether this really is the lifeline SMEs need to get through the pandemic.

Eligibility

The company must have a loan proposal that would be considered viable without the pandemic. This means that the loans are based only on the affordability of the business i.e. the ability to repay the money i.e. it is based on profit (or EBITDA : earnings before interest, taxes, depreciation and amortization). Therefore, if the business made a small loss or even a very small profit in 2019, the chances of borrowing under the plan are minimal.

Other loan criteria

The combination of a ban on personal guarantees for facilities under £ 250,000 and a government guarantee of only 80% clearly means that lenders may be reluctant to offer loans under the program which still carry a degree. significant risk. Therefore, many have found that lenders, who have the final decision on any application based on their own individual loan criteria, impose requirements that make it easier to deny applications, for example, by stipulating that they can only lend. 25% of the turnover of the previous year.

The minimum loan amount under the program is £ 25,000. Therefore, for a business to be eligible it must have a minimum turnover of £ 100,000. The reality is that for many small businesses who are suffering (think your sandwich shop down the street), the turnover is actually less than £ 100,000. In order to bypass this particular condition, companies are advised that they can apply for a loan outside of the scheme, which may be subject to alternative loan criteria.

Interest at the discretion of the lender

There is no stipulation on the interest rates that can be charged by lenders after the initial 12 month period, and there is also no cap in place. This means that lenders are looking to hedge their risk by offering higher interest rates on loans, surely with an eye on the fact that the Bank of England will not keep the base rate at 0.1% any longer. as needed.

However, no one knows how long the current situation of companies earning next to nothing because they are shut down will last, let alone how long the economy will suffer even after some restrictions are lifted. How can a business be sure that it can afford principal repayments now when it is not generating any income, or even afford principal and interest repayments 12 months from now?

Notwithstanding the above, statistics as of April 15, 2020 show that more than 6,000 loans have now been made under the program, of which over £ 1 billion has been loaned by the banking and financial sector, with a value of average of £ 185,000 per loan. These numbers will undoubtedly increase in the coming weeks. With nearly 1,000 loans approved every day, how will lenders be impacted?

Impact on lenders

Despite the government’s guarantee, the risk remains with the company and therefore the lender.

The common misconception is that the government takes the risk of 80% of the loan directly if a business goes bankrupt. However, the borrower remains 100% responsible for the debt, and therefore in the event of default, each lender will follow their standard commercial collection procedures (including the realization of collateral) before any claim is made (or can be) made under the guarantee of the State. for any shortfall.

This means that a lender will still have to incur all customary collection costs in pursuit of debt, which for installations under £ 250,000 will not be guaranteed, before they can rely on the government guarantee. If the prospects for collection are slim (but not zero), the lender will likely still be required to take this action before they can make a claim against the collateral.

In addition, if there is a personal collateral as collateral (for facilities over £ 250,000), the lender will be required to incur costs to pursue the debt under that collateral, which will be only 20% of the balance. outstanding payment. This will then raise many questions of proportionality for lenders, and whether it makes commercial sense to pursue those amounts, again based on an assessment of collectability.

Conclusion

There is no doubt that in the short term, the scheme is a welcome initiative for SMEs. However, given the state of the economy, which faces a long road to recovery, it remains to be seen whether it will be the savior of many SMEs in the long run, or whether after 12 months many businesses will shut down. will find themselves struggling with the added pressure of having to pay off debt that they did not previously have.

For lenders, even with the government guarantee at 80%, they may struggle to recover the remaining 20% ​​later. With the economy in turmoil and the forecast looking grim, it is no surprise that there is some reluctance to offer the loans under the program in the first place.

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