Loans applications including under CBILS – guidance for success

CoronaVirus Business Interruption Loan scheme

 

The loan scheme as it applies to SMEs

In March the government announced the CoronaVirus Business Interruption Loan Scheme (CBILS).  In a nutshell, the intention was to give small and medium sized businesses access to funding through loans, overdrafts, invoice finance and asset finance of up to £5 million and for up to 6 years. (The terms loans, overdrafts, invoice finance and asset finance are defined below).

The Government said it will guarantee 80% of these loans, the aim of which is to reduce the risk to the banks and thus encourage them to lend.  The guarantee is therefore to the lender and not the borrower.

The Government also said it will pay the interest on all loans for the first 12 months plus any lender fees.  This means no up-front costs and lower initial repayments.  Note:  the business is always responsible for repaying all the capital value (full value excluding interest) of the loan and will be responsible for all interest due after the initial 12 month period.

Value of loans available:

  • Loans of up to £5m for small and medium sized businesses (revenue of up to £45m)
  • Loans of up to £25m for businesses with turnover of £45m-£500m – the details of the scheme for these larger businesses are not covered in this paper.

Who qualifies?

  • UK based businesses with turnover of no more than £45m
  • Your business must meet other British Bank Eligibility criteria (namely your business must generate at least 50% of its revenue from trading and the funding will be used to support trading primarily in the UK.

What interest rates apply to the loans?

The interest rate applied to the loan depends on each bank and its proposals on a case by case basis.  The Government has not put any cap etc on interest rates.

What has changed compared to the initial announcement?

The original scheme was aimed at viable businesses who were unable to secure regular commercial financing.  This is likely to be because of a poor credit rating or maybe no credit history.  There was a “belief” that this scheme was only available to businesses that has been refused a commercial loan – this is clearly not now the case.

In addition, banks were found to be seeking personal guarantees for all CBILS loans including those under £250,000 which was really asking the Business Owner to put their personal savings and assets at risk should they be unable to repay the loan.

Under the recent changes, lenders are banned from requesting personal guarantees on loans under £250,000.

For facilities above £250,000, personal guarantees may still be required, at a lender’s discretion, but the lender can only recover a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied. This means that should you not be able to repay the loan, the business assets will be sold/liquidated first and the proceeds of that used to repay the loan.  Should that prove to be insufficient, your personal guarantee can only be called upon to repay 20% of the loan.  In addition, a Principal Private Residence (PPR) cannot be taken as security to support a personal guarantee or as security for a CBILS-backed facility so your home is never at risk and it cannot be part of the personal guarantee.  Other personal assets are at risk but to the limit mentioned.

Note, for all loans, lenders are likely to want some security against the loan such as a charge over your business assets.

Important Points to highlight

The banks are applying their normal assessment criteria when granting these loans in that they will only grant these loans to business that:

  • were already financially viable
  • can demonstrate that the need for the funding is directly related to the Coronavirus pandemic
  • have a demonstrable plan to get them back to a financially stable position

The scheme is aimed at businesses that have a sound borrowing proposal and a robust business plan but have found themselves suddenly impacted by the Coronavirus pandemic.  The granting of the loan will be directly linked to the negative impact that the Coronavirus is having on a business and should not and will not be used for any other reasons including refinancing any existing facilities.

Therefore, there is a strong need build a business case and tell a good story as part of your application process.

How do I access the scheme?

The funding is through your normal high street business bank.  There are 40 accredited lenders on the scheme and these include all the usual names such as NatWest, Lloyds, MetroBank, Santander, Barclays, Bank of Scotland and HSBC.  A full list is available at www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/current-accredited-lenders-and-partners/.

You access the scheme by approaching a bank, discussing your needs and the financing options available to you and demonstrating your business case and business plan as part of your application.

If your current business bank is not an accredited lender, I would still recommend approaching them, maybe in parallel with approaching an accredited lender as you have both a relationship and history with them.  With interest rates at an all-time low, it may make this a viable option for you.

Additional information from seeing some bank requirements:

Having liaised with some business owners who have already started to go down this route, I have managed to establish some information that throws a bit more light on the situation, in particular in understanding what the banks are asking for and considering when assessing loans applications.

It is clear that it is best to approach your existing bank as they are trying to service existing customers first.

The banks are applying their usual lending criteria when assessing the granting of credit so businesses do have to make a formal application and prove their case (more below on this). They will also look to pursue normal proceedings when trying to recover funds that are not paid in the agreed timeframe.

A summary of the package of information the banks are asking for as part of the application process

  • Information about your business, location, products, services, experience of management team, who the directors and shareholders are etc
  • The impact (business and financial) that the coronavirus is having on your business and your cashflow/liquidity needs over the next 12-18 months
  • The amount of funding you are requesting and a breakdown of this amount (why this amount? what will it be funding?)
  • The period you require the funds for and why
  • Measures already taken to reduce costs
  • Other Government schemes that you have applied for (they want to see that you have tried all avenues to support your business), e.g., the Coronavirus Job Retention Scheme, VAT Deferral, Business Grants where applicable etc
  • Most recent accounts including turnover, gross profit and net profit. They may consider looking back further than just the most recent year if you outline a strong argument for them to do so
  • A commentary on the recent financial performance of your business (particularly if revenue or profits are showing a downward trend)
  • An overview of your business prior to Covid 19
  • The Business Owner’s personal financial position/personal financial plans for the coming period including past methods of funding such as dividends taken
  • Details of any funding/lending already in place (both business and personal for the owners)
  • Some banks are applying a threshold, above which you have to submit a cashflow forecast for the next 12-24 months showing how you will repay the loan. This is to be accompanied by a commentary

In most cases the Bank will want to see a proposal from the business that outlines that you were a viable business before the Coronavirus pandemic hit and that the provision of funds will enable your business to work through this period of uncertainty and be a viable business again when the situation improves.  Thus they will most likely want to see:

  • The financial history of your business
  • Your plans for the period of the pandemic and
  • Your estimate of what your business will look like in the future (a budget and a cashflow projection most likely to be required here).

If you want any help in either preparing your application or if you want someone to review it, I would be happy to help. My contact details are below.  I am a Chartered Accountant and now run my own Business (Business Alignment Limited) aimed at supporting SMEs.

 Of course, I cannot guarantee the success of your application with the bank but I can help you in ensuring you put your best case forward and that your application makes sense and addresses all important areas.

 

Definition of terms

Loans

These are what one would know as standard loans.  The lender borrows a fixed amount on Day 1 and pays interest on the full amount borrowed. Interest is usually payable either monthly or quarterly starting at the end of the first month/quarter as appropriate.  The capital/amount borrowed is paid back during the term of the loan, again usually monthly or quarterly.  Thus the amount you have borrowed reduces over the life of the loan as you pay back instalments.  The interest amount payable reduces over the life of the loan also as the amount you have borrowed decreases.

Overdrafts

An overdraft is an arrangement you have with the bank whereby you can borrow money as and when you need it up to an agreed amount.  The benefit of an overdraft compared to a fixed term loan is that you only pay interest on the net amount you have borrowed and not the full value of the

 

overdraft facility when and if you are not using the full value of the facility.  However, fees and interest rates on overdrafts are usually higher than on term loans.

Invoice Finance

This is where a business sells their accounts receivable at a percentage of its value to a lender.  They provide you (the business) with funds equal to an agreed percentage of your accounts receivable balance up-front and they then collect the funds on those accounts from your customers.  The benefit is that you get the funds up-front and do not have to wait to be paid.  This can be beneficial if you work in an area with longer payments terms which can create cash flow problems.

Asset Finance

This is where the business offers its business assets (investments, stock, accounts receivable) as security on a loan.

 

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