How will the new Coronavirus Business Interruption Loans Scheme work?

More businesses should now qualify for the Coronavirus Business Interruption Loans Scheme (CBILS) according to an announcement made this morning by the British Business Bank, the entity managing the scheme for HM Government.
CBILS was announced recently by the Chancellor to provide finance of up to £5 million to small and medium sized businesses that are struggling due to the Coronavirus pandemic. This includes business loans, asset finance, invoice finance and overdrafts. The loans come with 12-months interest free credit and can be for terms of up to six years for loans and three years for overdrafts and invoice finance.
The scheme has encountered criticism as businesses have struggled to access the scheme with complaints about high interest rates, delays and requirements for personal guarantees to provide enough security for the loans.

The most notable change is to the requirements around security and specifically personal security for these loans. Most significantly the British Business Bank has told lenders to apply all these changes retrospectively to all applications made since CIBLS was launched. This means that businesses that have been previously turned down may now qualify and those with applications in progress will automatically have the new rules applied.
The first change to CIBLS is that lenders can no longer refuse a loan due to insufficient security. Some businesses had struggled under the original CIBLS to provide the level of assets required to meet the threshold of lenders. This amendment to CIBLS means those businesses that lack the level of security originally required by lenders may now be eligible.

The second change to the scheme is that lenders can only recover a maximum of 20% of the outstanding loan balance from personal assets used as security for the loan. The lender must recover the debt from business assets first and then only look to use the personal assets of the business owner or directors. A principal private residence cannot be included in a personal guarantee under CIBLS.

CIBLS already protects businesses from providing personal guarantees for loans under £250,000. However, those businesses requiring more than this could under the original CIBLS be asked to provide a personal guarantee for the loan. A personal guarantee places the assets of the business owner or directors at risk if they default on the loan and the business does not have enough assets for the lender to recover the debt. This latest change means that business owners will now have less personal risk than under the previous CIBLS scheme.

The third change to CIBLS is that businesses that have enough security to access finance outside of CIBLS are now accepted under the scheme. Previously these businesses would have been refused CIBLS and instead offered commercial finance on standard terms.
Businesses that have been refused CIBLS that may now qualify due to the changes above should approach their lender again and request their application is reviewed.

The scheme still has only 40 lenders despite there being many more in the business loans sector. There is a view that increasing the number of lenders would help to increase the number of businesses accepted and the pace of loans being processed.
The scheme has also been questioned about its suitability to help start-ups. The British Business Bank guidance states that start-ups that are in their first two years of trading should consider the British Business Bank’s Start Up Loans programme. This offers loans of £500 up to £25,000 at 6% interest per annum.

Small and medium-sized businesses can apply if they meet this criteria:

• Based in the UKTurnover not greater than £45 million
• Must be a viable business if it were not for the pandemic
• Self-certify that the business is negatively impacted due to the Coronavirus emergency
• Businesses from all sectors can apply, except public bodies, banks, insurers, reinsurers, further education, state funded schools

Businesses can apply directly to a lender or through a business loans broker. The broker will review the application and identify a lender they think most suitable for that business. They may even approach more than one lender in this process. If a lender refuses an application from a business, then the business can approach other lenders in the scheme. Each lender will still retain differing views on acceptable risks. The following documents are helpful when applying for CIBLS:

• Management accounts and historic accounts
• Business plan
• Cash flow forecasts
• A list of your business asset

You may not need all of these to successfully apply for CIBLS and some lenders may vary on their specific requirements. A broker will already know the documentation required for each lender under CIBLS and can therefore help you to prepare the required documentation.