The challenges of implementing the Coronavirus Business Interruption Loan Scheme

Posted: 02/04/2020

Penningtons Manches Cooper has written previously (Coronavirus Business Interruption Loan Scheme: the gates open and Coronavirus Business Interruption Loan Scheme: a lifeline for small and medium sized businesses) about the outline terms of the Coronavirus Business Interruption Loan Scheme (CBILS).

Interest in the scheme is high, with hundreds of businesses contacting their banks in an attempt to participate. However, since the previous articles were published there have been many reports of businesses having difficulties accessing the scheme, an outcry against some banks for not, apparently, being more supportive and/or demanding aggressive terms, and the government, in response, indicating that it will revisit some elements of the scheme in order to allow it to operate in the manner intended by the Chancellor.

There are three main issues with the current guidelines.

Firstly, the borrower has to have a business (according to the British Business Bank) or a proposal (according to the original guidelines) that the lender/bank would consider viable but for the Covid-19 pandemic – a subjective test in the hands of each bank which, anecdotally, excludes any business that has suffered a loss in recent (perhaps two to three) years, even if the business was on a trajectory to profit pre-pandemic.

Secondly, the banks have to decide if they can lend on normal commercial terms without having to make use of the scheme and if they can do so, they will: there appears to be a narrow qualifying bracket for the CBILS scheme in which businesses have to be viable yet not so viable that a bank can offer them normal commercial terms.

Lastly, as reported in our previous article, 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 most from the scheme. While this element also reflects the standard commercial terms criterion above, it also adds a further complication to the qualifying criteria: separately from the business’s viability is the question of whether there is available collateral. For many SME businesses, this available collateral will be in the form of personal assets of the owners. If the scheme is intended to support otherwise viable businesses that are being ruined by the pandemic, then a significant portion of such businesses will be cut out from the scheme where the owners have managed to build up some personal assets. Although the owners could then, in theory, borrow from the banks, those businesses would then be in a more vulnerable position (due to personal guarantees and security etc) than the arguably less successful businesses without collateral and guaranteed by the government under the scheme.

It is to be hoped that in the coming days, further guidance on these issues or a removal of some of the qualifying criteria will be announced. For example, having an objective test of viability would be welcome. This could include an assessment of a business’s accounts for the last three years, with an upward trajectory towards or into profit being an indicator of viability. If the lending on normal commercial terms is to remain, then there would be benefit in having clearly defined terms perhaps applying across all banks. The lack of collateral requirement should also be revisited.               

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