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The pitfalls of the Government backed CBILS

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John Foundling - Menzies Accountant

John Foundling – Corporate Finance Partner

One of the earliest measures announced to  help businesses impacted by the Coronavirus pandemic is the Coronavirus Business Interruption Loan Scheme, or CBILS which is available through the banks now.

What is the Coronavirus Business Interruption Loan Scheme?

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The scheme is designed to support those businesses that were trading successfully before coronavirus, but now face difficulty as a result of the current disruption.

Under the scheme, the bank loans the business money with the Government providing an 80% Guarantee to the bank. As with any other bank loan or financing agreement, the borrower remains 100% liable for repayment of the facility.

Who is eligible for CBILS?

To be eligible for a loan under CBILS, your business must be:

  • UK based, with group turnover of up to £45m     
  • Be unable to meet the bank’s normal lending requirements for a fully commercial loan, but be considered viable over the longer term, were it not for the impact of the coronavirus over the short-to-medium term.
  • In an eligible sector, there only a few exceptions.

Amounts of up to £5m can be borrowed for terms of up to 6 years, with all interest and fees paid by the Government for the first 12 months of the loan. In addition, some banks are offering an initial capital repayment holiday.

How do I apply?

In the first instance business should familiarise themselves with all of the other Government support available and take advantage of VAT deferral and the Coronavirus Staff Retention Scheme to furlough staff, etc. Then after speaking to suppliers and the landlord (as appropriate), you will be able to update your budgets and forecasts to calculate what additional funding you may need.   Having then identified what additional funding you need. You will then be ready to approach your bank with the updated forecasts and a list of the other actions taken and Government support accessed.  

So, what is the problem?

The need for personal guarantees

First and foremost is that many banks are requiring personal guarantees. Whilst the Scheme ‘rules’ do not allow the banks to look to your primary residence as security, other personal assets can be looked to in the event of default.

In the event of a default, the bank will seek repayment from the business first, liquidating all of the business assets and then if there is a shortfall seek repayment under any personal guarantees before turning to the  the government.

Whether ethically or commercially the banks will pursue personal guarantors to bankruptcy they would have the option. Therefore, some business owners may well find the risk unpalatable.  

However, we are in fast moving times and it would appear from comments in the press this morning that one of the banks has removed the requirement for a Personal Guarantee.

Businesses need a short-term cash injection

Secondly, amongst the banks there is a concern that the requirement for them only to lend to viable businesses will not prove straight forward.

However, assuming that Coronavirus will only impact for say 2 -4 month and by presenting the right package of information and spreading the repayments over a sensible period the scheme will help many businesses to get past the current crisis.

The conclusion?

On its own the CBILS is not the ‘silver bullet’ that early announcements made it appear, but in conjunction with the other support on balance presents a good opportunity to plan for the future once this crisis has passed as it most surely will. There is a delicate judgment call for business owners to make.   

If you are looking for short term finance and would like to discuss the options available to you, please contact your usual Menzies representative who can arrange for you to speak to one of our Corporate Finance experts.

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