The Coronavirus crisis has given the banking system a perfect opportunity to atone for the sins of the past. Rishi Sunak’s Coronavirus Business Interruption Loan Scheme (CBILS) is designed as an immediate life-support package to small and medium sized enterprises (SMEs) whose businesses have been brought to a near standstill. The CBILS encourages lenders to make available funding whether as a normal term loan, an overdraft or invoice finance or asset finance facility to SMEs and provides the lender with a government-backed guarantee for up to 80% of the outstanding facility.
It is reported that since the announcement of CBILS (coordinated by British Business Bank), thousands of applications have been received, but lenders have faced criticism from Downing Street and applicants for imposing onerous conditions. The lenders had insisted that borrowers provide personal guarantees with the lending risk effectively being passed back to the borrower/SME business owner. This requirement seems to misinterpret the very intention of the CBILS, which is seemingly to act as a cash lifeline for SMEs. Reacting to the public criticism, Barclays, Royal Bank of Scotland, Lloyds Banking Group, Virgin Money and HSBC have now said they will not ask borrowers for personal guarantees on loans up to £250,000, but added that security on larger loans would be decided on a case-by-case basis and could include personal guarantees. So, what’s exactly in the detail of the CBILS?
Which SMEs can apply?
The main criteria for SMEs to satisfy are that they must:
- Be UK based with a turnover of no more than £45 million per annum.
- Generate more than 50% of its turnover from trading activity.
- Have a credible borrowing proposal which under “normal circumstances” would be considered viable by the lender – if the facility is granted, the SME would not go out of business in the short-to-medium term.
- Operate within an eligible industrial sector.
What are the key terms?
- The maximum facility is £5 million. Lenders will determine the amount of the facility by reference to turnover and annual costs (specifically rents and salaries).
- The facility will be repayable from three months up to six years.
- The facility can be provided as a normal term loan, an overdraft or invoice finance or asset finance.
- The CBILS provides a lender with a government-backed guarantee for up to 80% of the outstanding facility. The government-backed guarantee for the loan repayments is designed to encourage more lending, rather than bail out the borrower, who remains fully liable for the debt.
- The first 12 months of interest payments are met by the government by paying a business interruption payment directly to the lender (the theory being that businesses benefit from lower initial repayments).
- Capital repayments are the responsibility of the business.
- The security taken will be at the discretion of the lender. It is worth noting that The Royal Institution of Chartered Suveyors (RICS) has recognised that the Coronavirus pandemic is making inspecting property difficult as a consequence of government imposed restrictions or the unwillingness of occupants to grant access. Access to evidential valuation data such as comparables will also be less freely available. RICS members have taken to qualifying valuation reports by reference to the “material valuation uncertainty” created by the current circumstances. Valuation reports are now commonly qualified by such statements as “We are faced with an unprecedented set of circumstances on which to base a judgement. Our valuation(s) is therefore reported on the basis of ‘material valuation uncertainty.’ Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of the property under frequent review”. Whilst this is entirely understandable from the point of view of the valuer, such statements and qualifications give little comfort to a lender seeking to rely upon a valuation of property in order to complete a CBILS advance and to secure a charge over such property.
How can SMEs apply?
Businesses should make contact with the participating lenders directly. There are currently more than 40 accredited lenders all listed on British Business Bank’s website.
The key point is what exactly was the government hoping to achieve from the CBILS? Arguably, if an SME business has uncharged assets and a continuing cashflow and is in a position to borrow then it most likely will do so and it would be hoped that its corporate banker would be keen to support it. If, on the other hand, the government is seeking through the CBILS to support SMEs suffering from a weakening cash flow (as a consequence of the Coronavirus crisis) in an effort to assist these businesses to stay solvent and productive then, perhaps, a grant rather than a loan scheme might have achieved more. SME business owners are unlikely to be willing to incur more debt unless they can see some prospect of repaying it when this crisis subsides.
Unfortunately the Government’s recent announcement of a temporary amendment to the UK’s insolvency framework (view article) may be insufficient to persuade careful SME business owners to sign up to a CBILS loan.
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