Last week, the UK government announced a new so-called Coronavirus “Bounce Back Loan” scheme (CBBLS) which aims to supplement existing Government assistance for UK small and medium sized businesses attempting to navigate the period of economic uncertainty arising from the COVID-19 pandemic. This scheme officially launched today (4 May 2020).
This article summarises the key features of both the Coronavirus Business Interruption Loan Scheme (CBILS) and the newly introduced CBBLS and the support available for SMEs under each scheme.
Since it will not be possible for SMEs to apply for a loan under both schemes, this article will also compare the features of each scheme and analyse which loan may be preferable for a business in particular circumstances.
Coronavirus Business Interruption Loan Scheme (CBILS)
CBILS can provide facilities of up to £5m for smaller businesses across the UK; it is delivered through the British Business Bank’s roster of 40+ accredited lenders. CBILS supports a wide range of business finance facilities including: term loans, overdrafts, asset finance and invoice finance. CBILS was launched on 23 March and will be open for applications for an initial for a period of 6 months (subject to extension if the COVID-19 emergency period continues).
Who is eligible to apply under CBILS?
The Government’s stated eligibility criteria for CBILS are that your business must:
- be UK based in its business activity with annual turnover or no more than £45m;
- have a borrowing proposal which, were it not for the Covid-19 pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable your business to trade out of any short-to-medium term difficulty; and
- not fall into the following categories: (i) banks, building societies, insurers and reinsurers (but not insurance brokers); (ii) the public sector including state funded primary and secondary schools; or (iii) employer, professional, religious or political membership organisation or trade unions.
The British Business Bank also provides an eligibility ‘checklist’ which states that businesses should only contact a lender to participate in the CBILS scheme if it meets the following criteria:
- Your application must be for business purposes.
- Your CBILS-backed facility will be used to support primarily trading in the UK.
- You must be a UK-based SME with annual turnover of up to £45m.
- You wish to borrow up to a maximum of £5m.
- Your business must generate more than 50% of its turnover from trading activity.
Key features of the CBILS scheme
- Up to £5m facility: The maximum value of a facility provided under the scheme is £5m.
- 80% Guarantee: The government will provide lenders with a guarantee of 80% on each loan (subject to a cap for each lender).
- No fee to access scheme: The government will not charge businesses or banks for this guarantee.
- Repayment terms: Finance terms are from three months up to six years for term loans and asset finance and up to three years for revolving facilities and invoice finance.
- Interest and fees paid by the Government for 12 months: The Government will make a “Business Interruption Payment” to cover the first 12 months of interest payments and in some cases, any lender-levied fees.
- Security: The Bank may wish to take security over a business’ assets, although an existing security interest will not exclude businesses from the scheme. For facilities above £250,000, the lender may require a personal guarantee from a director or shareholder but the guarantee will exclude the Principal Private Residence (PPR) and recoveries under the guarantee will be capped at a maximum of 20% of the outstanding balance of the CBILS facility.
Coronavirus Bounce Back Loan Scheme (CBBLS)
The CBBLS launched on Monday 4 May 2020. Like CBILS, CBBLS will be delivered through a Government network of purported “accredited lenders”, comprising many of the 40 + institutions (including all the major banks) already included on the Government’s list of accredited lenders for CBILS.
Who is eligible to apply under CBBLS?
A business can apply for a loan under CBBLS if it:
- is UK based in its business activity;
- has been “negatively affected by Coronavirus”; and
- was not an ‘undertaking in difficulty’ on 31 December 2019. In practice, this means that the business must have been viable and a going concern prior to the COVID-19 outbreak.
Businesses not eligible to apply under CBBLS include banks, insurers and reinsurers (but not insurance brokers), public-sector bodies or state-funded primary and secondary schools.
Key features of the CBBLS scheme
Although the scheme was only officially launched today and therefore certain features have still to be unveiled, at the time of writing, the known features of the CBBLS scheme are as follows:
- Up to £50k facility: The maximum value of a facility provided under the scheme will be £50,000 (or 25% of annual turnover, if this is lower), with a minimum loan of £2,000. This is a significant decrease to the £5m borrowing limit under the CBILS scheme.
- 100% Guarantee: The Government will guarantee 100% of each loan, unlike under CBILS where only 80% of each loan is Government backed (and subject to pre-lender caps on claims).
- Term and repayment: Like under the CBILS scheme, the maximum loan term is up to 6 years.
- Interest and fees: The loan will be interest free and no repayments or fees will be due for the first 12 months. After the initial 12 month period, the Government has agreed a fixed interest rate of 2.5% per annum with all lenders.
- Security: Although not yet officially confirmed, it is thought to be unlikely that lenders will require security for loans of the £50k limit or less.
Analysis – CBILS vs. CBBLS – which one should you apply for?
The CBBLS scheme has been introduced by the Chancellor, Rishi Sunak, in response to feedback that the CBILS scheme has in practice seen a complex and lengthy application process with limited prospects of approval for SMEs. Figures released by the banking industry trade body on 23 April showed that 25,262 CBILS loans worth £4.1bn have so far been distributed to SMEs. This equated to only 48% of the 52,807 businesses that have applied. By contrast, France said it expected to distribute €40bn (£35bn) worth of loans to local businesses by the end of the April.
Businesses and banks have blamed the 80% limit on the guarantee under the CBILS scheme for the slow provision of emergency credit, with lenders imposing arduous verification tests on the creditworthiness of applicant businesses, many of whom are already struggling with the economic impact of the COVID-19 pandemic. As reported in the previous version of this article, several lenders (including Barclays and HSBC) have been requesting personal guarantees in respect of loans granted under the CBILS scheme.
By contrast, the CBBLS loans are 100% underwritten by the Government and Mr Sunak has described them as “a simple, quick, easy solution for those in need of smaller loans.” The application process will involve filling out a short online form of 7 questions, with the Government claiming funds can be made available within days of approval.
Although certain details of the CBBLS scheme are still to be confirmed and it remains to be seen how streamlined the process will work in practice, in principle, the smaller size of loans and the fact that these loans are guaranteed in their entirety by the Government should see lenders taking a more relaxed approach towards credit checks and timing of release of funds.
In line with the statistics above and as envisaged in the previous version of this article, we have seen that businesses who would not typically be able to obtain debt finance at this stage in their life cycle have struggled to meet the eligibility criteria relating to trading under the CBILS scheme. For example, early stage and pre-revenue technology and life sciences companies whose principal activities are research and development.
Obviously the amount of emergency funding required by a business will be the key factor in deciding which scheme would be preferable to apply under, since the CBILS scheme covers loans of up to £5m compared to the much lower £50k limit under CBBLS.
If your emergency funding requirements are smaller (i.e. £50k or less) and short term only e.g. your business has been impacted by COVID-19 but you have been managing through historic cash reserves to date, the CBBLS scheme would ostensibly be more appropriate for assisting with replacing any lost working capital. There is a 3-month draw down period for loans under CBBLS and funds could be repaid at any time if ultimately not required (with no early repayment fees payable under this scheme). The application process is expected to be much quicker than under the CBILS scheme, with greatly increased chances of an application being successful and no personal guarantees or security being required from lenders. It is also possible to transfer loans of £50k or less made under the CBILS scheme to CBBLS, which would seemingly be a prudent move since the CBBLS loans are interest free for the first 12 months and the Government has compelled lenders to offer a fixed 2.5% per annum rate for the remaining term of a CBBLS loan, which is lower than the varying commercial rates of interest which are being offered under CBILS.
Consider if you have existing debt or equity investors
Businesses applying for either a CBILS or CBBLS facility should consider whether they have any existing credit facilities or contractual arrangements (for example, shareholders’ agreements) which contain restrictions on additional borrowing prior to making an application.
The British Business Bank’s resources on CBILS are available at: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils/
A full list of accredited lenders is available at: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils/accredited-lenders/
Further information on how to apply under the CBBLS scheme is available at: https://www.gov.uk/guidance/apply-for-a-coronavirus-bounce-back-loan
We will continue to update this article as further information becomes available.