What is the Coronavirus Business Interruption Loan Scheme (CBILS) and should my business apply for a loan?

As COVID-19 rapidly spread across the globe, most high street businesses were forced to close as government-sanctioned lockdowns brought the economy to a halt. In the UK, all retail stores other than food shops and pharmacies shut their doors on 23 March 2020. Offices remain closed for all but essential workers or those who can’t do their job remotely. Restrictions are slowly easing, for example, parts of Europe are now open at limited capacity. In the UK department stores are slated to re-open on 15 June 2020 with restricted footfall and social distancing measures in place. Much is unknown about what lies ahead, but the general consensus is that there will be challenges across nearly every sector.

That said, the human species is unsurprisingly, rather resilient. We’ve endured catastrophes, pandemics and wars in the past – this crisis is no time to give up or doubt the human spirit. Innovation, grit, and adaptation brought us out of the 2008 Global Financial Crisis (GFC). While this unfortunately feels like a not so distant memory, it shouldn’t overshadow the determination that carried us through the last prosperous decade. The GFC was caused by an entirely different set of circumstances yet COVID-19 evokes similar emotions as both events have crippled the economy. The headline-grabbing photos of devastated traders and boarded up shops are eerily similar to memories from 2008. Most who were of working age during the Great Recession will likely recall it felt like the end - no one seemed to know when the world would hit rock bottom. During training Deutsche Bank’s London analyst class peered out their office window and watched a queue form outside the now-defunct Northern Rock bank. The bright-eyed graduates were welcomed to the workforce by witnessing the UK’s first retail bank run since the 19th century. At the time, recovery seemed almost impossible but here we are today. Not only did we survive, but some of the most groundbreaking and prolific companies we know today were born from the Great Financial Crisis.

The success stories of the last 12 years provide a degree of comfort as well as inspiration as we navigate today.

CBILS VS BBLS

Government funding in the form of debt may be the best, and likely the only option for many businesses across the UK who are weathering the COVID-19 storm.

The Coronavirus Business Interruption Loan Scheme (CBILS) is one of the government support vehicles designed for small and medium-sized businesses in the UK. The UK government has created a number of programs, including CBILS as well as the Bounce Back Loan Scheme (BBLS). The Bounce Back Loan Scheme has some advantages. Processing times are typically faster and loans have a 100% government-backed guarantee. So far, Bounce Back Loans have a high approval rating of approximately 80%; however, Bounce Back loans are capped at £50,000. The Bounce Back Loan Scheme is certainly helpful for a small business or one that doesn’t need to borrow much. If you require funding above £50,000, a CBILS loan may be the right choice to meet your current working capital requirements. It’s also worth mentioning that you can’t apply for a Bounce Back Loan if you’ve already been approved for a CBILS facility. The same applies in the opposite scenario. Although if you have a CBILS facility, you may apply for a Bounce Back Loan if the Bounce Back Loan proceeds will be used to refinance the CBILS loan in full.

GOVERNMENT SUPPORT FOR UK BUSINESSES DURING COVID-19

In the UK, there are currently multiple types of government-backed advice, grants, and financial instruments available to UK businesses of all sizes.

The Coronavirus Business Interruption Loan Scheme (CBILS) began accepting applications on 23 March 2020. The program is scheduled to run for six months and provide finance to small and medium-sized businesses adversely affected by COVID-19. The government is pumping money into the system so companies who are experiencing decreased cash flow caused by COVID-19 can survive and reboot once restrictions are eased. The UK government’s finance schemes are a short-term solution, but it’s the best option for the time being and certainly preferable than simply letting society collapse. There are eligibility criteria and borrowing limits but all things considered, the CBILS program can provide businesses fair terms and access to much-needed capital.

ELIGIBILITY FOR GOVERNMENT SUPPORT

If you’re a business owner and not sure where to start in securing support, reach out to Kriya. We provide multiple solutions including furlough advance, and CBILs. Gov.uk’s Coronavirus Business Support blog is a good place to read stories about UK businesses of all shapes and sizes and how they utilised different government schemes and obtained help over the past few months.

It’s important to understand all the support channels available to your business before moving forward with taking out a loan. To start, some regulations have been temporarily relaxed by the government. These changes may help you decrease your expenses or quickly pivot your business without too much red tape during the pandemic. Certain retail, leisure and hospitality businesses are eligible for rates relief, which is applied to your 2020-2021 tax year bill. You can also defer VAT payments due between 20 March 2020 and 30 June 2020, and HMRC won’t charge interest or fees if you choose to defer during this time. This is a deferral and you still must make the payment, just later in the year. For certain businesses, there are also grant funds.

For employers who are not able to pay their employees, there’s support through the Coronavirus Job Retention Scheme. The program allows you to claim 80% of an employees monthly wages up to £2,500 per month. The furlough scheme is helpful but is also limited - this is a drastic reduction in income for employees who make more than £30,000 per year, but still a better option than no pay.

If you have already furloughed employees and are still awaiting payment from HMRC, Kriya’s Furlough Advance solution allows you to advance funds and make payroll.

If none of the above measures provides enough help and you’re in need of more than £50,000, the CBILS program is the next logical option. The CBILS program has more extensive eligibility criteria than the BBLS so it’s worth reading up on these and deciding upfront which scheme is a better fit to your business.

CBILS ELIGIBILITY

The key eligibility requirements for a CBILS loan are listed below. A full FAQ regarding what types of SMEs may apply can be found here.

• UK-based business;
• Annual turnover of no more than £45 million;
• Confirmation your business wasn’t classed as a business in difficulty as of 31 December 2019;
• A self-certification your business has been adversely affected by COVID-19;
• Your business is not a bank, insurer, reinsurer, public-sector body or state-funded primary or secondary school.

CBILS LOAN OVERVIEW

The Coronavirus Business Interruption Loan Scheme (CBILS) provides finance to SMEs via accredited lenders and partners. Finance facilities are available in the form of term loans, overdrafts, invoice finance and asset finance. Here are some key components of CBILS:

• Amount Loan facilities up to £5 million;
• Term Maximum term of six years for term loans and asset finance, and a maximum of three years for invoice finance and overdraft facilities;
• Guarantee The lender has an 80% government-back guarantee against the outstanding loan balance. The borrower is 100% responsible for the debt. This means the borrow is responsible for repaying the loan;
• Business Interruption Payment The government is assisting borrowers by paying interest and fees for the first 12 months including any lender closing costs;
• Security For facilities up to £250,000, there are no required personal guarantees. For facilities over £250,000, personal guarantees may still be required, but recoveries are capped at a maximum of 20% of the outstanding balance after the proceeds of business assets have been applied. A principal private residence (PPR) may not be included as collateral to support the loan facility or as part of a personal guarantee.

DOCUMENTS YOU WILL NEED TO APPLY FOR CBILS LOAN

Before applying for any type of loan it’s important to first prepare your company’s financial statements and incorporation documents. The lender will assess these documents as part of reviewing your application. This process involves analysing your company accounts and financial statements to determine the value and viability of your business. The lender will then decide if your requested loan amount fits within their risk parameters and ultimately a loan amount and interest rate based on that value and risk. Many lenders are sizing loans roughly based on 25% of annual turnover, which could be just enough to cover your cash shortfalls throughout this period.

In the case of obtaining CBILS finance, lenders are also reviewing if the uncertainty of COVID-19 will affect your business in the short to medium term. From there, they’ll analyse whether your business is viable despite performance impacts in the short to medium-term due to coronavirus. This means lenders are looking for viable businesses with a healthy revenue stream that only came to a stop due to the coronavirus.

Here’s an overview of the documents a lender will require. Exact requirements may vary for each lender, but it’s a good idea to have these items on hand before approaching a CBILS accredited lender.

1. Management Accounts Year to Date (YTD) Profit and Loss statement (P&L) as well as a cash flow statement;
2. Historic Accounts 2019 Year-End Profit and Loss statement, 2019 Year-End Balance Sheet;
3. Assets Details of your business’ assets; 4. Business Plan This can be particularly useful if you want to use loan proceeds to pivot or adjust your business to thrive in the “new normal” COVID-19 world, for example, adding an online shop for your brick and mortar store.

DECIDING HOW MUCH FUNDING YOU CAN AFFORD

A lender will review your company’s financial statements and assets, and then determine if they want to lend to you, how much they’ll lend to you, and as well as the interest rate for the loan.

CBILS ACCREDITED LENDERS, PARTNERS, AND NON-LENDER PARTNERS

Although CBILS loans are 80% guaranteed by the government, the government is not directly making loans to businesses. Instead, finance is accessed by applying through accredited CBILS lenders and partners. A complete list of accredited lenders and partners can be found here as well as a list of non-lender partners who are listed at the bottom of the same page. Non-lender partners are trade organisations who often provide useful information, resources and advice for businesses but don’t lend money.

Every accredited lender has an 80% guarantee from the government on each CBILS loan, and the borrower is 100% responsible for repaying the loan.

Although every accredited CBILS lender is lending the government-backed funds they each have their own lending parameters and criteria. All lenders want to ensure borrowers can repay the loan and interest beyond the first year that is covered by the government.

There are multiple forms of accredited lenders. As a general rule of thumb, retail banks are more risk-averse than alternative lenders. Alternative lenders include categorised as challenger banks, asset-backed lenders and smaller specialist lenders. Since retail banks take on less risk, they also typically provide lower interest rate loans compared to alternative lenders. Alternative lenders can be more open to a higher-risk or a less viable business but in turn the borrower will be charged a higher interest rate. In addition, there may be additional forms of lender protection included in the loan agreement.

Each accredited lender will have different loan parameters and rates, and some offer unique services and solutions. To start your search for a COVID-19 loan, the advice on uk.gov suggests enquiring with your business bank first. While this may ultimately be the best option depending on your needs and situation, there are many reasons to consider accredited CBILS lenders other than retail banks.

Some alternative partners offer speciality services such as invoice finance, a more bespoke solution that’s not provided by all lenders. If you return to the list of CBILS accredited lenders and click the “Invoice Finance” button in the upper right-hand corner, you’ll see the only accredited lenders for invoice finance are alternative partners rather than high street banks. Alternative partners can sometimes process loan applications faster than a retail bank. Many utilise cutting-edge technology or a unique proprietary platform so they can execute and analyse your application faster than a bank.

High street banks are massive institutions often using clunky technology that is too expensive or big to replace for the time being. Alternative partners can be innovative, nimble companies who may be able to provide solutions best-suited to your business needs sooner rather than later. As an analogy, think of the amount of time it takes to send someone money for the first time using PayPal (about thirty seconds, all your need is their email address or phone number). Now compare that process to sending funds to a new payee using a high street bank interface (typically a process that requires multiple checks and data inputs and sometimes use of a security fob as well).

In an instance where a retail bank rejects your CBILS loan application or can’t provide you with a suitable solution, you can still apply with another lender. In this scenario, alternative partners should be considered. They may be willing to lend to a higher risk business if the borrower is willing to pay a higher interest rate. It’s also worth considering alternative lenders if you’re finding a retail bank is simply taking too long to process your application, and you have immediate capital needs. Under the CBILS program Kriya can lend up to £150,000 in the form of a term loan or up to £5 million for an invoice finance facility.

EVALUATE WHAT YOUR BUSINESS NEEDS

It’s important to consider what type of funding is useful for your businesses’ short-term needs and feasible revenues in a post-COVID world. If you operate a business with a physical location social distancing restrictions must be taken into account. If you can operate remotely, evaluate how annual turnover may change due to evolving consumer interests and needs.

Whilst it’s difficult to project revenues as there’s no clear view on our “new normal,” all options from a CBILS traditional term loan to invoice finance should be considered. A loan may bridge a gap and allow for growth.

Fully understanding the interest rate structure is equally important. Ask any potential lender if the rate adjusts after the initial 12-month period paid by the government and if there’s a cap on the rate. You don’t want to be saddled with debt service you can’t pay one year from now, particularly if your business is still in recovery mode. While it’s clear the government wants to help those who are currently struggling, you only want to take on debt you can afford.

Going forward

Government support schemes are clearly needed during this time. By mid-May, the government had already lent £22bn through the CBILS and Bounce Back Loan Scheme. For business owners, the coronavirus pandemic presents a number of challenges in both the near and short-term. Since the onset of the pandemic, there’s been vast loss both physically and financially, and there’s no clarity on how or when this will end. The government-supported loan programs are here to facilitate future security, development, and prosperity across the UK.

It’s time for business owners to focus on the longer-term as it’s now evident what was once the status quo no longer exists. The pandemic requires businesses to adapt to our new environment. Companies should see these conditions as opportunities rather than yearn for what once was. While the present feels bleak, remember that a healthy world, albeit a different one, is on the other side of this. Let’s move forward.