Is the Coronavirus (Covid-19) Business Interruption Loan Scheme working?
Providing approximately £90,000,000 of government-backed business interruption loans to nearly 1,000 SMEs since its launch on 23 March 2020, the Coronavirus (Covid-19) Business Interruption Loan Scheme ("CBIL Scheme") has been a vital lifeline for many UK SMEs in these unprecedented times.
However, implementation of the CBIL Scheme has not been as smooth as the UK Government perhaps hoped. Participating banks have been criticised for requiring personal guarantees as collateral, and, as per original guidelines, for requiring borrowers to have been denied a commercial loan before they can be considered for the CBIL Scheme. Concerns have also been raised about the absence of funding for the 'squeezed middle' of business which are too large for the CBIL Scheme but lack the investment-grade credit rating required in order to access the Bank of England's Covid Corporate Financing Fund.
Today, the Chancellor has announced measures to clarify and in some aspects, relax the criteria for the CBIL Scheme and provide much-needed support for a section of the 'squeezed middle'.
So what has changed?
The CBIL Scheme will continue to be delivered through a revised version of the existing Enterprise Finance Guarantee Scheme and operated by the British Business Bank, and the original eligibility criteria still apply (on which see our original thoughts here).
However, two significant changes have been announced:
- Lenders will now be prohibited from insisting on personal guarantees to support loans of less than £250,000 which are advanced under the CBIL Scheme, a move which will be welcomed by many borrowers.
- Businesses are no longer required to have an application for a normal commercial loan denied before they are eligible for CBIL Scheme loans. This will, in effect, open up the scheme to many more potential applicants and crucially, speed up the application process.
Lenders are still permitted to ask for personal guarantees in respect of loans above £250,000, but the amount recoverable under them will be capped at 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied (i.e. not in respect of the 80% of post-recovery losses which are already guaranteed by the UK Government).
The expanded scheme will be operational with accredited lenders from Monday 6th April 2020.
What's new?
In addition to the changes to the CBIL Scheme, the Chancellor has announced a new scheme for elements of the 'squeezed middle': the Coronavirus Large Business Interruption Loan Scheme (the "CLBIL Scheme").
Full details of the CLBIL Scheme will be announced later this month, but the UK Government has already confirmed:
- The CLBIL Scheme will be available to firms with a turnover between £45,000,000 and £500,000,000.
- Lenders will continue to benefit from a guarantee from the UK Government to cover 80% of their post-recovery losses.
- Loans under the CLBIL Scheme may be up to £25,000,000.
- Loans will be offered at commercial rates of interest.
The announcements today have been welcomed by the business community and have addressed some of the issues been raised by SMEs over the past few days.
Questions that remain are:
- What rates of interest will the banks charge under both the CBIL Scheme and the CLBIL Scheme? The Business Interruption Payment (BIP) which covers interest and fees applies only to the first year. Noting that loans can be extended for up to 6 years, prospective borrowers will need to ensure, as best they can, that they can service the loans for the full term once the BIP has ceased.
- Can the banks accommodate a significant uptick in applications and ensure that loans are extended as quickly as possible?
- The CLBIL Scheme does alleviate some of the pressure on the 'squeezed middle' but is £25,000,000 enough?
- There are still many companies who are vital to the UK economy who cannot access any of the 3 government schemes – CBIL Scheme, CLBIL Scheme and CCFF. No doubt the government is working on structures and bailouts bespoke to various sectors stranded in this group but this may take some time. Equity and credit markets are going to be tested like never before.
Please do reach to your usual Ashurst contacts if you would like to speak about any of the schemes discussed above.
With special thanks to Sebastian Brignell, Associate, for his contribution
