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Lending and lockdown: the government’s coronavirus loan schemes for SMEs

/ 15 June 2020

Daniel Shear

‘Neither a borrower nor a lender be’ runs the advice in Hamlet: advice that probably didn’t anticipate the economic pressures of a pandemic 400 years later.  Fortunately, the need for UK businesses to borrow is being addressed by the government’s coronavirus loan schemes and a growing range of lenders, both national and regional: not only high street banks but alternative lenders too.

Of the five main lending schemes launched by the UK government, only three are aimed at small and medium sized businesses (SMEs):

  • Bounce Back Loan Scheme (BBLS)
  • Coronavirus Business Interruption Loan Scheme (CBILS)
  • Future Fund (FF)

The two schemes for large businesses are:

  • Coronavirus Business Interruption Loan Scheme (CLBILS)
  • Covid Corporate Financing Facility (CCFF)

How do the loan schemes differ, how effective have they been so far and what does the economic outlook mean for businesses exploring these schemes?

Bounce Back Loan Scheme

Launched in May, and offering term loans of between £2,000 and £50,000 for up to six years capped at 25% of turnover, BBLS is an undoubted success story.  According to the latest figures:

  • Over £26 billion has been provided to 863,584 SMEs, an average loan size of £30,500
  • 82% of BBLS applications have been successfully approved

Some reasons the BBLS has proven so successful is the ease of applying, which consists of a short set of questions requiring the applicant to self-certify, and the speed in which loans are approved and provided.

There are currently 21 accredited lenders providing BBLS.  BBLS loans are also very borrower friendly with no payments in the first 12 months and thereafter a low interest rate of 2.5%.

BBLS still requires applicant businesses not to be “undertakings in difficulty”.  This means that businesses with cumulative losses may be ineligible, though even then undertakings in difficulty may still be eligible subject to State Aid rules.

While noting the success of BBLS, there is a concern as to the ultimate cost of the scheme to the taxpayer.  The government provides a 100% guarantee to BBLS loans – this means the banks are not financially exposed if BBLS borrowers fail to repay, which could result in irresponsible lending by the banks: precisely what they have been prevented from doing since the 2008 credit crunch.

This is no criticism of the banks, who are merely undertaking schemes introduced by the government.  After it became apparent that CBILS was not working as intended (as we discuss in the next section), there were numerous calls for the government to introduce 100% guaranteed loans.  It’s unclear whether the impact on taxpayers of the government providing 100% guarantees was properly estimated.

We have more details of BBLS in this article.

Coronavirus Business Interruption Loan Scheme

CBILS attracted much criticism when it was introduced, as covered in our article on the scheme’s first month.  Now that the scheme has been running for nearly three months, how much has changed?

The restricted viability criteria (principally, that the applicant’s accumulated losses cannot exceed 50% of subscribed share capital), is still very much a concern.  To an extent, this concern has been relieved by the introduction of BBLS and FF, but BBLS only provides up to £50,000 of borrowings and FF is not for everyone – many businesses will be ineligible (or may not want) to apply for the FF, as we explain below.

According to the latest CBILS figures:

  • Over £10 billion has been provided to 49,247 businesses, an average loan size of £205,000
  • 51% of CBILS applications have been successfully approved.  The remaining 49% includes outstanding applications which may yet be approved, withdrawn applications and rejected applications – there is no data as to the split of the 49% between these three cases.  Further, all the data only reflects lodged applications and does not take into account enquiries which do not turn into applications.

One successful facet of CBILS is the number of lenders who have been accredited.  There are now 90 participating providers.  The lenders include all the main high street banks, as well as challenger banks and alternative lenders such as crowdfunders and asset-based lenders.

Only 64 of the lenders operate nationally; the remaining 26 operate regionally, meaning that applicants have access to local lenders knowledgeable about lending within the regional community.

One major impediment to the success of CBILS remains the length of time taken to approve applications.  Whilst some loans have been approved quickly, most are taking quite a long time to be approved, with the banks requiring detailed historic and prospective financial information which is beyond the capability of some SME applicants.

We’re not advocating irresponsible lending, but given that the banks’ exposure under CBILS is minimal (20% for loans up to £250,000, and 0% for larger loans assuming personal guarantees are honoured), and given that the whole purpose of CBILS is to provide financial support to SMEs that are losing revenue and seeing their cashflow disrupted as a result of coronavirus, it remains a concern that some CBILS loans are not more forthcoming.

While the banks are far from alone in suffering from staff shortages, and some may be overwhelmed with loan applications, it would be a welcome development if they could find a way to speed up the application and approval process.

Future Fund

The FF aims to support innovation, providing convertible loans of between £125,000 and £5 million on a matched basis.  Applicant businesses do not need to be profitable, and can be pre-revenue, but they must have raised £250,000 from third party investors in the last five years.

The loans, which carry a minimum 8% rate of interest, convert to equity on a qualifying funding round, sale or IPO, at a 20% discount to the then prevailing rate.  Loans which do not convert attract a redemption premium of 100%.

These terms are not dissimilar to standard private equity style deals and some SMEs may consider the terms harsh.  Certainly, the terms do not offer any enhanced benefit to the investee business other than the availability of up to £5 million of matched funding (unlike BBLS and CBILS under which, for example, the government pays interest for a year).  Therefore, many SMEs may not be keen to apply given the lack of any ‘additional benefit’ other than the provision of matched funding.

Naturally, many SMEs will also be ineligible to apply if they have not been capitalised with sufficient third-party equity investment in the last five years.  Others may be eligible but not currently in a position to seek additional outside equity/convertible debt.

Despite this, 155 loans have already been approved, totalling £146 million.  This represents an average loan of just under £1 million per investee company.

The 155 loans approved represent 27% of all applications but this should not be construed as a low rate – the scheme has only been running for three weeks, and applications require input from the investee company, an outside lead investor and a solicitor, so it is unsurprising that FF loans can take a while to process.

Coronavirus Business Interruption Loan Scheme and Covid Corporate Financing Facility

CLBILS loans have an 80% government guarantee for businesses with turnover of over £45 million.  Loans are up to £200 million, though loans of over £50 million come with restrictions on dividends, senior pay and share buybacks.  Unlike CBILS, there is no interest paid by the government on CLBILS loans.  To date:

  • £1.8 billion has been lent to 279 companies under CLBILS, an average loan of over £6 million
  • The loans granted represent 42% of applications

CCFF has been launched more recently.  Through this fund, the government buys ‘commercial paper’ issued by large, investment-grade businesses making a material contribution to the UK economy.  Over £16 billion has been lent to 55 businesses at an average of approximately £300 million per business.

The government are producing weekly lists of issuers of CCFF commercial paper (i.e. borrowers).  Unsurprisingly the list includes many household names in the travel, leisure and hospitality industries.  However the list did also attract some negative publicity when it was revealed that £1 billion was lent to the German-owned BASF and £600 million to the Italian-owned CNH, neither of whom apparently paid any corporation tax in the UK last year.

A mixed bag

Even allowing for the different ages of the coronavirus loan schemes, their effectiveness has clearly varied.

BBLS has proven popular and successful: if your SME is in urgent need of cash, you should apply for a BBLS loan, though be aware that this would then preclude application for loans under any of the other schemes.

Some businesses may be ineligible for any scheme.  Unfortunately, that is inevitable given that, on the whole, the schemes still rely on responsible lending.  As advisers to a wide range of SMEs, we hope that the schemes will, between them, support a sufficiently large number of UK businesses through the lockdown and ensuing recession so as to minimise corporate failures and mass unemployment.

We really welcome the large number of lenders who have come on board to support businesses and offer loans, with over 40 new lenders being accredited in the past two months.  It is particularly helpful that alternative lenders are now offering CBILS: if your business is not successful in applying for a CBILS loan with your own bank, there may now be other lenders who would consider granting a CBILS loan.  The number of regional lenders is also a positive development and we hope more regional lenders will be accredited as legitimate alternatives to traditional lenders.

Naturally, any loan must be repaid and it is important to consider your business’ ability to service loans beyond the initial 12 months (particularly for BBLS loans, against which there are no repayments in the first 12 months).  Even after lockdown, the UK (and indeed most of the world) will likely be in a deep recession and businesses may be affected for a number of years.

Amidst all the lenders, it’s worth noting one particular borrower: the government.  It has borrowed unprecedented amounts of money to help the UK through coronavirus and this will eventually need to be repaid – an increase in taxation in the short to medium term is therefore quite likely.

These factors will make the servicing of debt harder to achieve post-lockdown.  Prudent spending, cost control, cashflow management and business planning will remain absolutely vital for all businesses in order to survive.

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.

Daniel Shear

Partner, Corporate Finance

T +44 (0)20 8922 9321
E daniel.shear@bkl.co.uk

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