March 26, 2020

Coronavirus Business Interruption Loan Scheme: what is it and will it work?

What are the key takeaways?

  • The Government will make a business interruption payment to cover the interest and lender fees for the first 12 months.
  • Facilities of up to £5 million per business are available.
  • The Government will provide lenders with a guarantee of 80% of the value of each loan.
  • The scheme is available for an initial period of 6 months from 23 March 2020.
  • At the lender's discretion, the need for security may be waived for facilities of under £250,000. For facilities in excess of £250,000, the lender must establish a lack or absence of collateral before a business can use the scheme. Primary residential property cannot be taken as security under the scheme.

Which businesses can benefit?

To be eligible, businesses must be UK-based with a turnover of £45 million or under per year.

The British Business Bank has said that the purpose of the scheme is to support SMEs that do not meet a lender’s normal lending requirements in the present Covid-19 situation, but which are considered viable in the longer term.

Lenders must still be convinced that the provision of finance will enable the business to trade effectively enough to beat any short-term difficulty, and the scheme is not intended to prop up lame ducks or merely provide a stay of execution.

If a lender would be eligible for a normal commercial loan, that loan must be used and the scheme cannot be called upon.

Is CBILS the last resort?

The scheme rules do not say, in terms, that CBILS is only meant to be used a last resort. But commentators suggest that, in practice, lenders will expect businesses to have first explored alternative options, such as furloughing employees and tax deferments, before approaching lenders.

How do businesses access the scheme?

The scheme is accessed through banks and finance providers, rather than directly through the Government. All major banks are involved with the scheme and some 40 accredited lenders are participating.

Queries must be addressed to the normal bank used by the business, rather than the British Business Bank.

Will the banks be pragmatic?

It is expected that banks will concentrate on the provision of funding to their own existing customers initially, and the first step is for businesses to contact their relationship managers.

It is not clear how long the approval process is likely to take or what level of due diligence the banks will perform.

Some businesses fear that the banks will be too conservative in their approach. In recent times, many banks have taken a restrictive approach to commercial lending generally.

They often require high levels of security over the assets of businesses (and sometimes also over the assets of their major shareholders or directors) and these stringent conditions can make the package unpalatable for the business.

Will the CBILS scheme work?

It is too early to judge the level of take-up under the CBILS scheme. But the banks' exposure to 20% of the risk may make the banks very cautious in practice.

In many ways, it would be understandable for the banks to take a risk-averse approach. They are faced, as are we all, with a once-in-a-century emergency for which nobody has the playbook.

The scars of the 2008 banking collapse are still fresh. The Brexit uncertainty following the end of the transition period on 31 December 2020 still looms in the background. The US political environment is also likely to be volatile as the presidential election in November approaches.

However, the CBILS scheme will be a failure if banks do not take a pragmatic and reasonable approach. They must play their part in supporting viable businesses through this unprecedented situation.

The Government must closely monitor the operation of the scheme and revise the rules if the banks do not move swiftly to extend appropriate credit.

What about larger businesses?

Larger companies will are outside the ambit of the CBILS scheme may be able to access support through the Covid-19 Corporate Financing Facility, under which the Bank of England will purchase short-term debt to assist companies with their cash flow.

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