Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
Introduction
On 2nd April 2020 the UK Government announced that it had expanded CBILS and made changes to the scheme in order to address some criticisms of the original scheme, which went live on Monday 23rd March 2020.
The expanded scheme is designed to increase the availability of CBILS to a greater number of SMEs and speed up the rate at which funding can be made available by lenders to borrower SMEs. The revised version of CBILS has been offered by lenders since Friday 3rd April 2020 and became operational on Monday 6th April 2020. CBILS will initially run for six months.
The UK Government has also announced a comparable scheme for larger businesses – the Coronavirus Large Business Interruption Loan Scheme (‘CLBILS’). This scheme will be available to businesses with a turnover of more than £45 million. CLBLIS is not yet active but it is expected to be operating by the end of April 2020.
This article is intended to provide an overview of CBILS and answer a range of questions relating to the scheme. It aims to assist business owners, directors and those providing personal guarantees (who may or may not be business owners and/or directors) to understand what CBILS covers, how it is intended to work and how they may be able to use it. It does not deal with the mechanics of the proposed CLBILS for larger businesses.
What is CBILS?
CBILS is a new scheme that can provide facilities of up to £5 million for SMEs across the UK, who are experiencing lost or deferred revenues, leading to disruptions to their cashflow. CBILS supports a wide range of business finance products, including term loans, overdrafts, invoice finance and asset finance facilities.
What’s changed in CBILS Version 2.0?
The changes from the original CBILS scheme include:
(a) Eligibility criteria - Previously, if the relevant business could be offered lending on standard commercial terms then the business was ineligible under CBILS. Some lenders were, therefore, refusing to make loans under CBILS and instead only offering loans on the lenders’ standard commercial terms, which included high interest rate payments and other more onerous obligations compared to CBILS. However, the new CBILS can be utilised irrespective of whether the business could be offered standard commercial terms.
(b) Collateral criteria - The original CBILS required that the relevant business must have insufficient collateral to offer towards the loan. Lenders frequently interpreted this as meaning that owners with available assets must offer a personal guarantee under the loan at considerable risk to the individuals.
Who can apply?
To be eligible to apply for a facility under CBILS, your business must be able to meet the following criteria:
(a) UK business – The business activity must be UK-based. It may be operated through a company, limited liability partnership, limited partnership, partnership (including partners in partnerships), freelancer or sole trader.
(b) Turnover – The annual turnover of the business must not be more than £45 million. The business must generate more than 50% of its turnover from trading activity. Where the annual turnover of the business is more than £45 million, the business may be able to use the new Coronavirus Large Business Interruption Loan Scheme (CLBILS).
(c) Viable borrowing proposal – The business must have a borrowing proposal, which the lender would consider viable if it were not for the current pandemic and for which the lender believes the provision of finance will enable the business to trade out of any short-to-medium term difficulty.
(d) Self-certification – Whilst this would appear to be a tick box exercise, you must be able to legitimately self-certify that your business has been adversely impacted by the coronavirus (COVID-19). Businesses not adversely impacted must not attempt to utilise CBILS.
Preparing to apply
The requirements of each lender may vary but their primary requirements are likely to be similar. The latest Government guidance advises businesses to prepare details of the loan (amount, purpose and period for repayment) and to prepare the evidence likely to be required by a lender such as:
(a) management accounts,
(b) cash flow forecast,
(c) business plan,
(d) historic accounts, and
(e) details of assets.
It is important that business owners and directors (and those giving personal guarantees) also carry out appropriate commercial steps including:
(a) Background information – Fully review the Government guidance and the information available on CBILS (particularly from the British Business Bank) so that they fully understand the scheme;
(b) Lenders - Fully consider the type of finance required, the accredited lenders which provide that finance under CBILS and which of those accredited lenders to approach – it may be quicker to utilise existing lender relationships and they may provide more favourable terms where they have a better understanding of your business;
(c) Management and compliance – Ensure that all of the relevant decision makers of the business are involved from an early stage, review relevant constitutional and other documents for approval requirements (for example, shareholders’ agreements, partnership agreements and other loan facility documents), and determine the nature and extent of the loan required for the business – the amount, term, interest payable (noting the Government covers only the first 12 months interest);
(d) Minutes and records – It is important to document the decision making process and retain records. This should include the matters considered, the decision to use CBILS and the reasons for that decision. The reason for this is that, at a future date, the decision makers (for example, directors) may be required to justify their decisions (for example, did they comply with their directors’ duties.
How to apply
At the time of writing, 47 lenders have been accredited by the British Business Bank. The number of accredited lenders is likely to grow. The names of the lenders can be found on the British Business Bank website at https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils-2/current-accredited-lenders-and-partners/
The British Business Bank suggests that, in the first instance, businesses should approach their own provider – ideally via the lender’s website. They may also consider approaching other lenders if they are unable to access the finance they need. Not every accredited lender can provide every type of finance to which CBILS relates but the British Business Bank website provides a filtering tool which indicates the type of funding available from accredited lenders in different regions.
Loan fees, costs and interest
There is no guarantee fee for SMEs to access CBILS. The Government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees. Accordingly, SME’s will benefit from no upfront costs and lower initial repayments.
Lender loan security
Lenders are entitled to take security (including debentures and charges) for the loans made under CBILS. However, there are limitations on the amount and nature of personal guarantees.
Whilst insufficient available security is no longer a condition to access CBILS, where there is sufficient security available, it is likely that the lender will take such security in support of a CBILS facility.
Personal guarantees
There are 2 main categories of loan facilities for this purpose:
(a) Loan facilities under £250,000 - Under CBILS, lenders may not take personal guarantees of any form for such facilities.
(b) Loan facilities above £250,000 - Under CBILS, lenders may still require personal guarantees. However there are limitations on such personal guarantees:
(i) Liability cap - Recoveries are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied; and
(ii) Principal Private Residence (PPR) – The guarantee cannot include the PPR of the guarantor.
Liability for repayment
The borrower will always remain 100% liable for the repayment of the debt. The CBILS guarantee from the Government is to the lender not to the borrower. Accordingly, it is important that the borrower’s plans include the repayment of any loan facility.
CBLIS Loan facility - Worked example
Helpfully, the British Business Bank has provided a worked example as to how a loan facility and security may work in relation to a hypothetical CBILS loan facility above £250,000.
In this example:
(a) Stage 1 - There is (a) £1 million CBILS loan facility, and (b) a personal guarantee.
(b) Stage 2 - The borrower business repays £400,000 of the CBILS loan facility. However, it then defaults on the repayment of the balance of the facility, owing £600,000.
(c) Stage 3 - The Lender recovers £100,000 from other business assets secured under a debenture (for example, stock), leaving £500,000 outstanding still to be repaid by the borrower.
(d) Stage 4 – The Lender calls on the personal guarantee. The Lender can call a maximum of £100,000 (as it is capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied),
(e) Stage 5 – This leaves the Lender with a loss of £400,000. The Government covers £320,000 of this loss under CBILS. Accordingly, the Lender loses £80,000.
Need to talk?
Whatever stage you or your business has reached, we can help you to understand the different legal and related issues arising from the coronavirus outbreak so that you can choose the option that is right for you and/or your business.
Contact us
If you would like more information about CBILS or the other measures taken by the UK Government in relation to the coronavirus outbreak or would like to discuss a potential or existing CBILS loan facility or other issue, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full Legal Notices on our website.
©Orr Litchfield 2020
