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Coronavirus Business Interruption Loan Scheme (CBIS): less than it seems?

/ 23 April 2020

Daniel Shear

Today marks one month since the UK Government introduced the Coronavirus Business Interruption Loan Scheme (CBILS) to support small and medium sized businesses (SMEs) who are suffering as a result of the coronavirus lockdown.  Newly published data at this one-month point is an opportunity to assess the scheme’s effectiveness and whether it has delivered as much as it promised.

What does CBILS offer?

Under CBILS the Government provides a guarantee of 80% of each loan and covers interest payments and any lender-levied fees in the first 12 months.  The scheme is administered by the British Business Bank (a Government-owned bank) but is delivered by commercial lenders.

When the scheme was launched there were 40 lenders.  This has since increased to 48 lenders.

Initially lenders were seeking personal guarantees, but on or around 6 April the rules were changed so that lenders could not seek personal guarantees for loans below £250,000, and for larger loans the personal guarantee is limited to 20% of the outstanding balance of the facility after the proceeds of business assets have been applied.  Any personal guarantees cannot be secured on principal private residences.  This is a very welcome amendment to the rules.

Has CBILS worked?

UK Finance published data today showing that:

  • 16,624 CBILS loans had been made by 22 April
  • The total value of the loans was £2.8 billion, meaning the average loan size was £170,000
  • The number of loans the previous week stood at 7,609, so the weekly increase in loan numbers was 118%
  • CBILS loans have been made to 46% of the 36,186 completed applications made to lenders.  It is important to note that this is completed applications – the previous figures as per 14 April of 21% was of all applications made which included partial applications
  • The remaining 54% of outstanding applications include those still to be processed, applications that have been declined, those that may turn out to be ineligible and cases where the applicants decide not to proceed

It was reported on 14 April that over 300,000 CBILS enquiries had been made to lenders.  Whilst this figure has not been independently verified it is likely to be much higher now, but even if it not then little more than 5% of enquiries have resulted in loans being made.

The misconception

Before looking at how CBILS may have failed, it is important to point out that CBILS is a bank loan, made by an independent bank, to viable businesses who are suffering due to COVID-19.

CBILS was announced at the same time as a whole raft of other Government initiatives including the Coronavirus Job Retention Scheme (CJRS), whose grants to businesses obviously do not need to be repaid.  CBILS is not, and was never intended to be, a grant.  The aim of CBILS is to provide liquidity to SMEs at a time they might be struggling.  However, given the number of grants that are now available, including CJRS and the Self-employed Income Support Scheme, it is perhaps unsurprising that there is a misconception as to what CBILS actually is.

So why do so many SMEs feel the CBILS hasn’t worked?

The question remains as to why the enquiry-to-loan conversion rate remains low.  Of the numerous reasons, three in particular are worth exploring.

1. Viability criteria

Given that CBILS borrowers are meant to have a borrowing proposal which the lender would consider viable were it not for the current pandemic, the British Business Bank introduced viability criteria.  One applies to limited companies with less than 250 employees, which are more than three years old and are seeking borrowings of greater than £30,000: namely that accumulated losses at 31 December 2019 cannot exceed half of the company’s subscribed share capital.  Many SMEs have a nominal share capital, most often £100, and have never had equity investment – for these companies accumulated losses cannot exceed £50.

Many successful SMEs make losses in their first few years before breaking even and finally becoming profitable, however they may only have accumulated profits after around 4 to 7 years – all these businesses would automatically be precluded from applying for a CBILS loan until they are in an accumulated profit position.  These viability criteria are too restrictive and immediately deny numerous SMEs access to CBILS.

The banks should be able to assess the viability of borrowers themselves rather than relying on a simple metric from which a computer can be allowed to make a decision.

2. Restricted access to lenders

When CBILS was launched, lenders were supposed to maintain their market share of CBILS lending.  Many lenders chose to do so by only allowing CBILS applications from existing customers.

Any relaxation of the rules has not deterred many lenders from only accepting applications from existing customers because they are already familiar with their customers’ finances and can make quicker decisions than analysing an application from a new customer about which they have no knowledge.

This also comes at a time when due to the lockdown the banks themselves are short-staffed, staff are working from home and call centres are severely under-staffed, resulting in restricted access to lenders.

With various alternative lenders now being accredited, there may be a greater choice of lenders to apply to rather than borrowers’ own banks.

3. Banks being unaware of the CBILS rules

We know of a company which exports a large quantity, but by no means all, of the products they manufacture.  They applied to their bank for a CBILS loan. The bank refused it on the grounds that exporters are ineligible for CBILS loans.  Yet the British Business Bank explicitly states that exporters are eligible, even if exporting over 80% of their products/services.

These are just some examples of reasons the CBILS may not have been successful.  There are numerous others.  In particular, lenders have been requiring detailed historic and prospective financial information which many SMEs are struggling to provide.

How could CBILS be improved?

We would welcome an urgent detailed review of the scheme by the British Business Bank and/or and independent body given a suitable remit.  We would hope this would result in a relaxation of certain eligibility criteria, with banks being entrusted to make their own informed decisions as to which businesses are viable and which loans are most likely to be serviced.

We also hope that more lenders, including non-traditional bank lenders, will be encouraged and accredited to lend under the scheme. This would result in more supply for SMEs who are currently being denied by their own banks.

For more information on the support currently available to UK SMEs, and how we could help your business to access that support, please get in touch with your usual BKL contact or use our enquiry form.

Our June 2020 assessment of CBILS and the government’s other coronavirus loan schemes for businesses is here.

Daniel Shear

Partner, Corporate Finance

T +44 (0)20 8922 9321

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