COVID-19 Loan Schemes: What to consider before applying

As well as supporting innovative businesses through the new Future Fund (which you can read more about here), the UK Government has introduced three loan schemes designed to help SMEs, smaller businesses, and larger businesses.

• SMEs: Coronavirus business interruption loan scheme (CBILS)
• Smaller businesses: Bounceback Loan Scheme (BBLS)
• Larger businesses: Coronavirus Large Business Interruption Scheme (CLBILS)
• Things to consider before applying for any loan under the above schemes

SMEs: Coronavirus business interruption loan scheme (CBILS)

On 23 March 2020, the British Business Bank rolled out a temporary loan scheme for UK-based SMEs, who would otherwise struggle to access traditional bank lending and overdrafts. The premise of the scheme is that the government provides participating lenders with a government backed partial guarantee for 80% of the amount borrowed.

Provided you meet the eligibility criteria, you can apply to a loan of up to £5 million for a term of up to 6 years (reduced to 3 years in the case of overdrafts and invoice finance facilities). For loans above £250k, security, including personal guarantees, may be required at the lender’s discretion.

Eligibility criteria:

• the loan must be for ‘suitable’ business purposes, to be determined by the lender
• you must be able to self-certify that that your business has been adversely affected by COVID-19
• your business must be a UK-based SME with a turnover of up to £45 million
• you need to have a strong borrowing proposal that, were it not for the COVID-19 pandemic, would be considered viable by the lender
• your business must not have been classed as a ‘business in difficulty’on 31 December 2019, if you are applying to borrow £30,000 or more

Smaller businesses: Bounceback Loan Scheme (BBLS)

BBLS lenders are given a government backed guarantee of 100% to offer loans of up to £50,000 to businesses based in the UK, which are losing revenue as a result of the Covid-19 pandemic. The BBLS Scheme is initially open until 4 November 2020.

Provided you meet the eligibility criteria, you can apply to borrow from £2,000 to £50,000, up to 25% of turnover, and for a term of up to 6 years. The loan is interest-free for the first 12 months, after which you would be required to pay interest at 2.5% per year.

Eligibility criteria:

• you must be a UK limited company; or partnership; or tax resident in the UK; and carrying on business on 1 March 2020
• more than 50% of your business’ income must be derived from its trading (and not investment) activity
• your business must not be in bankruptcy and debt restructuring proceedings, or liquidation, nor must any of these processes be ongoing
• it must not be a type ineligible to apply for CBILS (i.e. a bank, insurer etc)
• you must ensure that the loan will not be used for personal purposes, but rather as an economic benefit for the business

Larger businesses: Coronavirus Large Business Interruption Scheme (CLBILS)

This scheme enables large businesses to borrow up to 25% of their annual turnover, but no more than double their annual wage bill for the most recent year available, up to a maximum of £200 million. Loans may be available from 3 months up to 3 years.

If you are thinking of applying for a CLBILS loan, remember that there are restrictions on this loan:

• you cannot make any dividend payments other than those already declared
• you cannot agree to make any share buybacks
• you cannot award any cash bonuses or pay rises to senior management except where declared before the CLBILS loan was taken out and provided that you are staying in line with similar payments made in the preceding 12 months; and the payments don’t have a material negative impact on your ability to repay the CLBILS loan

Eligibility criteria:

• you must be a UK based business
• your business must have an annual turnover of more than £45 million
• you must have not previously received support under the Bank of England’s COVID-19 Corporate Financing Facility (CCFF)
• you need to show that your business would be viable were it not for the Covid-19 pandemic, your business has been affected by it and the loan will enable you to trade out of any short-term to medium-term difficulty arising from the Covid-19 pandemic

Things to consider before applying for any loan under the above schemes

If you satisfy the eligibility requirements of one or several of these schemes, you must apply via the website of a participating lender (you can find them listed here). The lender is likely to first consider whether to grant you the finance on their normal commercial terms. If they can’t, they will then consider funding you under the relevant Government-backed scheme.

All loans are fully repayable by the borrower, and ultimately, the lender makes the decision. You should therefore not assume that a loan will automatically be available to your business just because you meet the set criteria, you also need to satisfy the lender’s internal requirements. The documentation for the schemes will generally be on standardised terms, and cannot be negotiated. If a lender declines your application, you can apply to another participating lender.

No new security will be taken but a lender can rely on their existing security from previous lending. For a CLBILS loan, any lending above £250k is likely to require a personal guarantee from a director. No security will be taken over the director’s home, but as ever with personal guarantees, personal assets may be put at risk.

From a practical perspective, you should first look at your existing arrangements and be speak to your existing lenders to work out what is available. For instance:

• are there undrawn funds available to be drawn down now (i.e. under a revolving credit facility or accordion facility)?
• are there are any ‘clean down’ periods in any working capital facilities on the horizon which can be satisfied now rather than in a few weeks’ time when cash may be more limited?
• can your existing lender make a short-term facility, such as an overdraft, available to help with short-term cashflow requirements?
• are there any waivers or consents required? Flagging them early will give lenders more time to consider and respond positively
• is funding under any of the above schemes permitted under your existing financing arrangements?
• are there any restrictions on your business incurring additional debt?

Remember that during the crisis, banks and other telephone services will be busy, and lenders have limited capacity to handle enquires because of social distancing. To assess whether your business is eligible, they will require you to submit information, financial and other, so it is worth having this ready before applying.

You can find details of other government measures to support public services, people and businesses through this disruption on the Government’s Business Support website

For more information on the CBIL, CLBIL and BBL schemes and to make an application under these schemes please visit www.british-business-bank.co.uk