Coronavirus Business Interruption Loan Scheme: the gates open

Posted: 25/03/2020

This article forms part of a wider range of materials available at our coronavirus resource hub and, in particular, develops our previous article concerning the Coronavirus Business Interruption Loan Scheme (CBILS).

On 23 March, the Prime Minister announced unprecedented peacetime restrictions on the UK population including the closure of all non-essential business premises.

The impact from this prohibition to those businesses not providing essential services will be severe and each business must consider every available measure to protect its business and safeguard its staff. On the same day as the Prime Minister’s announcement, CBILS went live. This is just one measure designed to support businesses during this time (a complete list is available here).

What can CBILS offer?

Since our previous article, the key features of CBILS have been developed, as set out in guidance available here. In summary, CBILS allows businesses to access a finance facility of up to £5million from certain lenders on repayment terms of up to six years, depending on the type of finance. The Government will provide the lenders with guarantees of 80% on every loan, subject to an overall cap for each lender.

There will be no guarantee fee charged to businesses but lenders will pay a fee to access the scheme. A business under CBILS will not pay lender-levied fees or interest for 12 months. This is an increase on the six-month free period announced last week.

A slight tightening of the regime has also been introduced concerning the security under a lending facility. If the facility is above £250,000, the lender must establish a lack or absence of available collateral before that business may use CBILS. This element is probably to ensure those businesses without collateral - and thus arguably in greater need - benefit from the scheme. This element also reflects that, if standard commercial terms can be offered by the lender to the business, they must do so.

CBILS will run initially for six months and  there is potentially no limit to Government backing.

Eligibility criteria

To be eligible for CBILS, a business must:

• not fall within an excluded sector (such as banks, insurers)
• be UK-based in its business activity with annual turnover of no more than £45million
• have a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable the business to trade out of any short-to-medium term difficulty.

It is important to note the following changes from the previous guidance:

• the £41million limit has been increased to £45million
• reference to being UK-based “in its business activity” may reflect the Government’s concern that UK registered companies may disseminate the facility funds among group companies outside the UK. Introducing UK business activity may assist in keeping the finance within the UK but we shall see whether these criteria are tested in the coming months
• the previous criteria which excluded businesses in receipt of state aid beyond €200,000 have been removed
• the “sound borrowing proposal” has been replaced with new considerations, as explored below.

Borrowing proposal

In our previous article, we predicted that CBILS would operate in a similar manner to

the Enterprise Finance Guarantee (EFG). This has been confirmed with the latest guidance for lenders under the CBILS scheme incorporating EFG documentation. In addition, the movement from the “sound borrowing proposal” to a requirement that considers the viability from the lenders’ perspective aligns with EFG requirements. The EFG will now be suspended and effectively replaced for the time being by CBILS.

The new form of borrowing proposal requirement is a two-fold test:

• Would the proposal be considered viable by the lender irrespective of Covid-19?
• Does the lender believe the business can survive short-to-medium term difficulty?

This two-fold requirement may be a tough challenge for some businesses considering the unprecedented and uncertain environment we find ourselves in. Businesses are faced with cash flow demands, breaches of contract, premises closures, restricted travel, remote working practicalities, evolving Government regulations, and navigating the variety of support measures. These pressures, combined with bringing together a viable borrowing proposal, may challenge the effectiveness of the scheme. However, it is clear that it will depend on the appetite of lenders to commit to CBILS as to whether proposals will meet the requirements.

What to expect

Over the next few weeks and months, we will see the extent to which UK businesses rely on CBILS and how receptive lenders are to the applications. With the exclusion of online retailers from the prohibition on business closures, we may see businesses typically reliant on a physical presence shift online and small and medium sized businesses may consider CBILS as a means to achieve this.

As advised in our previous article, businesses must consider the range of measures available and use them in tandem to secure their longevity. The preparation of potential borrowing proposals now may enable crucial funds to be released earlier.

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