Red flags to look for when spotting financial abuse
In his budget speech, he told us repeatedly that his measures would “get it done”, and as the crisis deepened over subsequent days, he announced more details of the CBILS, specifically aimed at protecting smaller businesses, and with the government agreeing to guarantee £330bn of bank loans.
So far so good, and the measures were welcomed by most commentators, but as the detail of the CBILS became clearer, there was increasing scepticism from many of the businesses which the measures were designed to protect. Many complained that the process of applying for a loan was unclear, that different banks were offering radically different terms and that unless you were an existing customer, there seemed limited prospect of success. Even more worrying was the negative reaction from the UK startup community; it seemed that the rules requiring a business to set out a “viable” business case would exclude many startups and scaleups, on the basis that they were yet to make a profit (whereas the rationale of many early stage businesses is to disrupt markets, to quickly grow revenue and often jobs as a result of angel and VC investment, and on the basis that profit will come later down the line). What had originally appeared to be a crucial lifeline to many businesses across the UK now appeared to exclude many of the UK’s most promising ventures.
Some were quick to blame the banks, and others said that the original version of the scheme was simply misconceived, but the numbers told their own story; by the end of March only 1,000 businesses had successfully secured a loan, and only £90m had been lent out. The Treasury responded on 2nd April by announcing changes to the scheme, and the banks were told that they needed to play their part in helping small businesses survive the crisis, but is the CBILS now working as intended and (if you appear to be eligible) how do you apply? Bearing in mind the issues already highlighted, might an application for CBILS be a waste of your time, when you have so many other critical issues to deal with? In this blog we shall be taking a closer look at the detail of the scheme, and the implications for applicants and those who succeed in securing a loan.
As long as you operate through a business account, sole traders, freelancers, body corporates, limited partnerships and limited liability partnerships can all potentially take advantage of the CBILS, and although most applicants will no doubt wish to take a loan, there are different elements of the CBILS on offer. Overdrafts, invoice finance and asset finance facilities up to a value of £5m are all potential options.
Repayment terms can be up to six years in relation to any loans or asset finance facilities granted, and for up to three years for any overdrafts or invoice finance facilities.
The British Business Bank is the entity responsible for running the CBILS and is doing so through over 40 accredited lenders. Although you will therefore apply to and enter into a loan or other agreement with a lender, the government provides a guarantee of 80% in respect of each facility granted. It is important to bear in mind that this guarantee is given to the lender, meaning that an SME taking on a facility under the CBILS is still liable to pay back the debt incurred. It is only where the lender is unable to recover from the SME that the guarantee can be called upon.
Lenders are required to pay an upfront fee in order to access the Loan Scheme, but there is no requirement for borrowers to do the same. The government’s financial support also covers the first 12 months of any interest payments incurred by the SME, as well as any lender-levied fees, under a “Business Interruption Payment”. Recent guidance published on the CBILS has also suggested that certain lenders will waive arrangement fees or early repayment charges in certain cases. However, businesses that trade in fishery, aquaculture and agriculture will not qualify as beneficiaries of a Business Interruption Payment.
Initially, the government gave lenders discretion as to whether they could use the CBILS to offer unsecured lending for facilities worth £250,000 and under. However, many lenders came under fire for requiring borrowers to enter into personal guarantees. This meant that if a business was unable to repay the debt, the lender would be able to recover against the personal assets of the individual who entered into the personal guarantee. The government’s guarantee in respect of 80% of any remaining debt, would only therefore be relevant in respect of any amount not recovered under the personal guarantee.
Following the Treasury’s alterations to the scheme, and the rap across the knuckles for the banks, they are now barred from requesting personal guarantees for any facilities worth less than £250,000. In respect of any facilities worth over £250,000, lenders may still require borrowers to enter into a personal guarantee, but any recovery made under such guarantee will be capped at a maximum of 20% of the facility’s outstanding balance.
A borrower’s primary residential property cannot form part of the security under the personal guarantee.
Apart from certain exceptions which are detailed below, all SMEs from all sectors are eligible to apply. However, an SME will need to meet the following requirements to be able to benefit from the CBILS:
Initially, the CBILS was designed to only offer facilities to SMEs who did not meet the requirements for a commercial facility. In their announcement on 2 April, the government has stated that this will no longer be the case, so SMEs who previously would have been eligible for a facility under commercial terms can now also apply to the CBILS.
At present, the following sectors and organisations are unable to make use of the CBILS:
Whilst larger businesses cannot benefit directly from this particular scheme, the government has recently announced plans to launch a new scheme called the Coronavirus Large Business Interruption Loan Scheme. Businesses with annual turnovers between £45m and £500m will be able to benefit from loans of up to £25m with a government guarantee of 80%. Any loans backed by a guarantee under the new scheme will have interest payments terms set at commercial rates. Further details of the scheme are due to be released by the government.
Clearly, the CBILS throws a potential lifeline to SMEs struggling with their cash flow in the short-term. The terms are highly preferential, and so any business which appears to be eligible should apply if they are likely to suffer difficulties over the next few months.
However, SMEs should carefully consider the level of debt they are prepared to take on. Highly geared businesses are often seen by lenders as high risk which, once current emergency measures are lifted, may make future borrowing even more difficult. Additionally, whilst the requirement for personal guarantees has been completely lifted for facilities worth under £250,000, some lenders may still ask lenders to enter into a personal guarantee for facilities worth more than £250,000. Despite being limited to 20% recovery under a personal guarantee, this leaves a substantial amount of risk in the hands of the business owner. Businesses should, therefore, tread carefully in respect of the security they are willing to grant lenders under the CBILS.
Despite the tweaks to the CBILS on 2 April, some businesses are still complaining about an overly complex process, where existing customers are still favoured over new applicants. Some commentators have speculated that if the banks do not rise to the challenge laid down by the Treasury, then the government will have no option but to bypass them entirely and make direct grants and/or take equity stakes in struggling companies. As already noted, many startups and early stage companies do not even appear to qualify, and the CBILS is cited by the “Save Our Startups” campaign (www.saveourstartups.co.uk) as evidence that the government is failing to support them.
What is clear is that Covid-19 represents an existential threat to businesses of all sizes across the UK. The government’s package of measures is indeed bold and radical, and will help many, but there is clearly a requirement for additional action. If the right level of assistance cannot be provided to those who need it most, many businesses will no longer exist when the lockdown begins to ease. If this is the case, then not only will we be struggling with the tragic legacy of Covid-19, but the UK economy will be facing a long road to recovery.
James Fulforth is a Partner and Head of the Corporate and Commercial department. James advises on corporate transactions, including angel, VC and PE investments, mergers and acquisitions, joint ventures, and re-organisations. He is an advisory board member of Angel Academe, the angel investor group, and regularly acts for founders of and those investing in early-stage and startup ventures.
Jessica Rice joined Kingsley Napley in September 2019 as a paralegal in the corporate and commercial team.
Partner and Head of Department
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