CBILS Update – the Chancellor has listened

Finally, there is some good news for SME business owners.

It’s been two weeks since Chancellor Rishi Sunak announced CBILS, the Coronavirus Business Interruption Loan Scheme, and SME business owners are getting scared. The government said the money would be available, and it’s not. Most businesses have made March payroll, many by the skin of their teeth. Now we’re into April and it’s still looking grim. There have been all sorts of negative comments in the press about personal guarantees, gouging interest rates, and entrepreneurs spending hours on the phone waiting to talk to someone, only to be told by the bank officers that they know nothing about the product. 

Keep calm and carry on. 

The new and improved rules regarding CBILS have now been published, and I’m pleased to say the Chancellor has listened. Some of the old rules still apply, many do not. Rather than providing a comparison of old versus new, I’m going with the new rules that came into force today. According to the British Business Bank, the new scheme should be operational with banks and other lenders from Monday 6 April.

In order to qualify for CBILS your business must:

• Be UK based in its business activity. This continues to apply to limited companies, unincorporated businesses, partnerships and sole traders. There is no detailed guidance on what “UK based” means. I expect it will relate to the registered and/or trading address, where the staff are located and where the customers and suppliers are located.
• Have an annual turnover of not more than ￡45 million. There has been additional guidance for groups of companies, where multiple companies are owned by a common holding company to form a group. The threshold is based on what is referred to as the consolidated group turnover (if you’re in a large group you’ll know because your audited accounts will be prepared on a consolidated basis), and as long as that threshold is not breached, each group company that meets the other criteria can apply.
• Have a borrowing proposal which the lender would consider viable, were it not for the current pandemic. This remains the crux of the scheme. You must have a sound proposal and business plan in order to qualify.
• Self-certify that it has been adversely impacted by the Coronavirus.

What facilities are available?

This appears to be unchanged from last time. CBILS applies to overdrafts, term loans and asset finance, and the banks are offering a minimum of between ￡10,000-25,000 up to a maximum of ￡5 million. Loans can be for a period of 3 months to 6 years.

No interest is charged on the loan for the first 12 months, nor are there any arrangement fees or early repayment fees in the first year. For loans outstanding beyond 12 months, interest will be charged and some fees may apply too. Based on a quick review of the main high street banks’ sites, interest rates appear to be attractive. Rumours of the banks gouging customers on interest rates may have been true but this should not be the case anymore.

Security and guarantees

This has changed a great deal.

The government guarantee remains a guarantee in favour of the lender, not the borrower. This means that your business remains on the hook for the full amount of the loan, but there have been big changes:

• There are no personal guarantees (PGs) on facilities up to ￡250,000.
• For facilities above ￡250,000 the lender can require a PG but this must exclude your personal private residence, which is the banking term for your main home. 
• Recoveries under personal guarantees are capped at a maximum of 20% of the balance on the facility after the proceeds of business assets have been applied. This is a huge change and it’s clear the government has upped its game to get the banks to make the loans.

This may be easiest explained by setting out a couple of examples. 

1. Jane Smith is the owner of JS Widgets Limited. She borrows ￡150,000 under the CBILS scheme. Sadly, her business does not survive the downturn and goes bust. The bank will have placed charges over the assets of her business, so that whatever is realised in the administration or liquidation of the company, the bank recovers that. The bank will also call on the government for the 80% guarantee. Because of the size of the loan, Jane has not given a PG and she has no further liability to the bank in respect of the CBILS facility. She doesn’t get anything from the business, and she doesn’t owe anything to the bank for the CBILS facility. (If there was other debt in the business with PGs she is still on the hook for that debt but not for the CBILS loan.)
2. John Brown is the owner of JB Products Limited. He borrows ￡1 million under the CBILS scheme. Sadly, his business does not survive the downturn and goes bust. The bank will have placed charges over the assets of his business, so that whatever is realised in the administration or liquidation of the company, the bank recovers that. Let’s say the recovery was ￡200,000. That goes straight to the bank and leaves a net amount of ￡800,000 owing (￡1 million less the ￡200,000 proceeds). John’s liability under the PG is ￡160,000 (20% of the ￡800,000 net amount owed). John remains liable to the bank to repay the ￡160,000 but the bank cannot place a charge on or force him to sell his main home. The bank will also call on the government for the remaining ￡640,000 (the 80% guarantee on the remaining ￡800,000). 

If you can afford to run your business with a loan of up to ￡249,999.99 then I strongly recommend that you do so. I always advise people to avoid PGs.

As before, be sensible with the amount of money you are applying for. You can furlough your staff to reduce the wages bill. You can ask your landlord for a rent holiday or some sort of break. No guarantee that it will be offered but it is certainly worth asking for. You can reach out to your suppliers and ask for deferred payment terms. There are many ways to conserve cash. I’ve seen guidance from some banks suggesting that the amount you borrow should not be more than 2x your annual wages and salary costs from 2019, nor more than 25% of turnover. Do what you can to stay below ￡250,000 and avoid the PG.

What information are the banks looking for?

You’ll need to provide:

The last 2 years of full accounts (not the abbreviated ones filed at Companies House)

• Your latest management accounts – P&L and balance sheet
• A business plan showing that, in normal circumstances your business was viable – i.e. it would have been able to trade without needing access to funds
• A conservative forecast for the business over the next 12-18 months. Don’t be afraid to show the impact of a reduction in sales by 50%, 75% or even 100% because of the Coronavirus. This forecast needs to justify the amount you are seeking to borrow, and to be clear about what costs you need to cover.
• For loans that require a personal guarantee (￡250,000 and above) you’ll need to include a statement of your personal assets and liabilities. Remember, they cannot place a charge on your main home.

Depending on which bank you go with there may be additional requirements, but as a minimum you will need to provide the above.

What next?

Log on to your bank’s website and get all the information they are asking for. Most banks are saying they will only deal with existing customers due to the volume of demand for this product. Normally I advise people to shop around, but if you need to get the loan quickly, stick with your existing bank. You may not get a deal with a new bank if you're in a hurry.

You may need some help if this is all new to you. You can talk to your accountant or other business advisor. 

Or you can talk to me. During my career, as a Chief Financial Officer of businesses large and small, I have raised tens of millions of pounds in debt funding. I understand exactly what the banks are looking for and I speak their language. I also speak your language as an entrepreneur. I’ve teamed up with a couple of friends who run a business called Robot Mascot and we are putting together a package called “Take this to the Bank” which is focused on helping entrepreneurs to secure the CBILS facility. If you’d like our help, please send an email to [email protected] and use the subject “Take this to the Bank”.

Stay safe and stay healthy

David