The Coronavirus Business Interruption Loan Scheme (CBILS) went ‘live’ last week.
After the initial human shock of the situation facing us all, attention has quickly turned to preparing to weather economic turbulence which is already impacting the bottom line for many businesses and likely to have far reaching effects. Informed by the messages we are hearing from both sides of the fence and in the context of the CBILS and debt financing to address cash flow issues, in this article we focus on the early phase of this crisis from both a borrower’s and a lender’s perspective and draw some practical conclusions to help you.
But first, a quick reminder of the key basics of the CBILS.
What is the CBILS?
To recap, the CBILS is for interest-free loans of up to £5m and will be available to SMEs from the British Business Bank through over 40 accredited lenders for the next 6 months. The Government guarantees up to 80% of any outstanding loan balance (click here for the lender list ).
Who is eligible to apply?
You are eligible to apply for a loan under the CBILS if:
- your business’s main activities are in the UK;
- your turnover is no more than £45m p.a.; and
- you present a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender to whom you are applying for the loan, and for which that lender believes the provision of finance will enable your business to trade out of any short-to-medium term difficulty.
Practical steps to securing support
The economic reality of almost every customer being adversely affected by the pandemic, coupled with entirely new ways of working owing to national lockdown, means bankers are experiencing the most challenging and busy period in living memory, certainly more shocking than the 2008 crisis. This means that businesses seeking help must be organised and clear.
‘We are all in it together’ is not just a soundbite. Banks and other lenders do not want to abandon their customers nor do they want suffer reputational damage and see their customers move banks when this crisis is over. So, just from a moral standpoint, now more than ever banks want to help.
But, customers must deliver viable and well thought out applications based on cold, hard figures, to secure help. And be aware that if you operate in a particular sector facing deeper challenges as a result of the COVID-19 pandemic, there will be additional hurdles to overcome.
In short, the CBILS is not a soft option for a handout.
If banks are able to provide finance on usual commercial terms and without recourse to the CBILS, the government encourages them to do so. Thus, you must first seek an open and honest exchange with your lender, discuss your financial position and explore possible funding solutions together. All lenders have a range of debt solutions and may be able to assist using another funding product or by simply revisiting existing loans and finding some flex in them to support you. For example:
- amending and restating existing facilities to relax covenants (even temporarily);
- interest and capital repayment holidays; and/or
- other loan products.
So be open to alternatives to CBILS loans. This is important, because if your bank is unable to step in and provide a loan to your business, it is far from certain that you can secure a loan from another lender under CBILS. We’ve spoken with the main clearing banks and the unofficial line is no ‘new to bank’ debt will be provided. Therefore, when dealing with you bank, as would be the case at any other time, you must present a sound business case in order to secure a loan under the CBILS. Further, banks want to see evidence of strong leadership from their customers, so do what you can to provide comfort that your management team is well-placed to rise to the challenges facing your business.
The rise of challenger banks and alternative lenders
We act for a number of new banks and alternative/secondary lenders. One of their key strengths (and advantages) up until the COVID-19 crisis has been how they run efficient and flexible credit policies and procedures. They deliver relationship banking with a human touch swiftly, removing some of the frustrations of dealing with corporate, ‘computer says no’ banking. Where a high street bank may be unable to support a business, it may well be worth looking at other options albeit imminent financial pressures may preclude holding a beauty parade.
Please note that if you are a business whose usual high street bank will not provide a loan under the CBILS and you wish approach another lender whilst preserving your relationship with your existing bank, you must still deal with certain practical issues - consents, negative pledge security restrictions, general covenants, other inter-creditor issues and others - which could take considerable time and cost to resolve. This may undermine the goal of using the CBILS (of alleviating short-term cash flow pressure).
Where next - will the CBILS work in practice?
Critics from all quarters say that the CBILS may not be fit for purpose, raising a number of issues. Apart from the practical requirements of taking on debt from, and granting security to, third party lenders, each lender can determine on its own criteria to whom it will lend on standard commercial terms and therefore who is eligible for a CBILS loan. Therefore banks have license to protect their balance sheets and make it hard to secure CBILS loans. Lending under the CBILS has been made a commercial decision for each lender rather than a national, centralised application process with lenders merely administering the loans and some say that is the wrong approach.
For example, we have seen news of one high street bank offering another loan when it was asked about a loan under the CBILS and then demanding a personal guarantee backed by a charge over the director’s home. This seems to run contrary to the spirit of the scheme and was heavily criticised.
But banks must be clear, that if businesses are forced to look elsewhere in the lending market because they cannot get the support they need from their existing bank, this would seem to undermine one of the fundamental purposes of the CBILS, which is to provide fast, much-needed support for customers.
Our experience shows that lenders do want to support customers, and they do value their relationships. So, if you are one of those customers needing help, remain calm and work together to find solutions. There has never been a more appropriate time to talk to your bank and your relationship manager/director. And, although they are hugely busy, they do make time for customers.
Need assistance? Get in touch
The landscape is changing on an almost daily basis, so we will continue to keep you up to date on developments, and with our thoughts on where the lending market is at.
If you are considering applying for funding under the CBILS or if you are reviewing your banking arrangements in general and would like to discuss any finance related matters from a legal perspective, please get in touch on our dedicated Covid-19 Helpline on 03330 433230.
