The British Government was quick to implement a generous stimulus package of financial help for businesses in the UK when we went into lockdown. With the Coronavirus Business Interruption Loan Scheme (CBILS), small and medium sized businesses with an annual turnover of up to £45 million can borrow up to £5 million in government-backed loans, asset finance, overdrafts and invoice finance.
We’ve written about the scheme and have more information on how to apply here. You may also be interested to read about changes that went into effect yesterday, 30 July, which have made CBILS funding even more accessible to smaller businesses.
While having four different funding options available is fantastic, it can also feel like things are a little complicated. So what’s the difference between an overdraft and invoice finance? And how can you decide if a loan is the best solution, or if maybe asset finance would suit you better? While they could all potentially help you out financially, depending on your cash flow needs and business model, there may be one option that’s more useful.
In this article we’ll take a closer look at the three most common forms of CBILS funding:
- CBILS overdrafts
- CBILS invoice finance
- CBILS loans
We’ll break down what they are, how they work and what kind of business might get the most benefit from each. Remember though, CBILS applications for all of these forms of funding close in September 2020. Make sure you apply before it’s too late so you don’t miss out on the opportunity to benefit from an otherwise disruptive situation.
What is a CBILS overdraft?
This is one of the simplest and most flexible finance solutions. It’s a good safety net that gives you a little wriggle room to help if your cash flow’s somewhat lumpy or affected by seasonality.
How does a CBILS overdraft work?
Put simply, a CBILS overdraft allows you to keep accessing funds from your business bank account after your account balance reaches zero. Normally you’d pay a fee for this service plus interest on the funds you use. But with a CBILS overdraft, the government will pay the fees and interest on your behalf for the first 12 months.
As with any of the CBILS funding options we’ll discuss here, the specifics will vary slightly from lender to lender. Under the scheme, lenders can give your business access to a CBILS overdraft as large as £5 million though not every lender will choose to offer the maximum limit. Your maximum limit will also be calculated based on what your business can reasonably afford to repay and will likely be reviewed every year by the lender.
Although CBILS overdrafts come with a government-backed guarantee, it’s important to remember that this is only in place to encourage more lenders to provide more funding during this time. Your business is still 100% responsible for any debt you accrue and you’ll have to take over any fees and all interest payments after the first year.
You can find a list of lenders accredited to provide CBILS overdrafts here.
Who is a CBILS overdraft best for?
Businesses that need a quick cash injection when unexpected costs creep up. You’ll have better flexibility with cash flow in case of emergencies or for giving you short-term funds for things like supply chain issues or unexpected bills you need to pay.
A word of warning: banks can reduce or withdraw an overdraft at any time – and may demand that you repay them immediately. And watch the fees as these can go up without discussing with you in advance.
CBILS INVOICE FINANCE
What is CBILS invoice finance?
For most growing businesses, the invoices you’ve issued for completed work are your biggest asset. The challenge however is that you might not be paid for 30, 60 or even 90 days, with COVID-19 disruptions pushing out your normal payment terms even further in some cases. That leaves a lot of your working capital tied up in your outstanding invoices.
With CBILS invoice finance, a lender will give you an advance against your outstanding invoices. This means that you can get most of the money owed to you upfront, without having to wait for your debtors to pay. You can get funding against some – or all – of your invoices, depending on your requirements.
How does CBILS invoice finance work?
The kind of CBILS finance backed by invoices that MarketFinance offers is called a CBILS revolving credit facility. Think of your outstanding invoices as a tank full of working capital. Having a CBILS facility lets you open the tap whenever you like to instantly let that cash flow. When your invoices are paid, the tank gets topped up again so you can continue the cycle. Withdraw. Spend. Repay. Repeat.
Normally with non-CBILS invoice finance (we offer that too), you’d pay service/subscription and listing fees plus interest on the funds you’ve advanced. But with a CBILS revolving credit facility, the government pays the fees and any interest on your behalf for the first 12 months. This makes a CBILS revolving credit facility a very affordable way to ensure steady cash flow as you take back control and head towards business as usual.
Remember, with a CBILS revolving credit facility or any other kind of CBILS invoice finance, you’ll start paying fees and interest after a year. All lenders will have their own specific eligibility criteria in addition to the basic CBILS criteria set out by the British Business Bank. In theory, you can get up to £5 million with this kind of funding but the facility offered to your business will be based on affordability and the lender’s maximum funding limit.
Who is CBILS invoice finance best for?
A CBILS revolving credit facility is great for businesses who are looking to trade their way back to new normal. Because the facility is backed by your invoices, you’ll need to make sure that you have outstanding invoices available. Most invoice-backed facilities (ours included) are best suited to businesses who sell goods or services to other businesses.
This kind of funding is a good fit if you want a flexible way to bridge gaps in your cash flow. You can choose to use a CBILS revolving credit facility once off or to take out a subscription that you can use regularly as and when you need funds.
You can find out more about MarketFinance’s eligibility criteria as well as how to apply for a CBILS revolving credit facility here.
What is a CBILS loan?
Loans are probably the simplest and most well-understood funding solution available through the CBILS. It’s a fixed amount of money borrowed for a fee and then paid back (with interest) in regular installments over an agreed period of time
In the case of CBILS loans, your funds will be interest-free for 12 months to help you weather the storm and focus on running your business. You’ll need to pay the loan off at the end of your loan term though.
How does a CBILS loan work
These will vary between lenders but all are government-backed and interest free for one year, with a maximum term of 6 years. You get all your money in one go and your interest rate will remain the same for the subsequent years. It’s important to remember that, although CBILS loans are government-backed, you will still need to pay back whatever you borrow.
When you repay a loan, the amount you pay is made up of the principal (i.e. the funds you borrowed) and interest (paid on the funds you borrowed). With a CBILS loan, your monthly/weekly repayments will only include the principal for the first 12 months. This is because the government makes the interest payments on your behalf. After the first 12 months, your monthly/weekly repayments will be made up of both the principal and the interest.
At MarketFinance we offer CBILS loans from £50,001 to £150,000 for 2 to 3 years. We also offer businesses the flexibility to choose our no-payment option. In other words, you can opt not to make any repayments for the first 12 months so you only start paying off your loan in year two. You can find out more here.
Who is a CBILS loan best for?
Anyone who needs a lump sum to kick start their route back to business as usual. If you don’t rely on invoices being paid to keep your cash flow healthy, an instant cash injection from a CBILS loan could keep the books balanced and help you get back on track faster. If your business needs to make practical changes to comply with social distancing guidelines, a CBILS loan is a quick and easy way to access the funds needed to cover those upfront costs.
HOW TO DECIDE
Think about what you need the money for and the amount you need. If your cash flow rests on customers paying you, an overdraft or revolving credit facility may be the easiest choice. If you know you need one lump sum and don’t have a ledger of outstanding invoices, then a loan may be the best option.
Sometimes more than one solution is the answer: every business is different. That’s why we make it possible for our customers (both new and existing) to access multiple funding solutions at the same time. You can also use a CBILS loan, for example, to refinance a Bounce Back Loan that you’ve already taken out with another provider. You can find all the information about our CBILS funding solutions here or check out our step-by-step guide to applying.
To read articles sharing advice, information and resources helping businesses affected by COVID-19, head to our resource portal.