Coronavirus – what financial help is available for SMEs and mid-market businesses?

First things first – talk to your lender

You may already have heard from your lender setting out the kinds of things they can help with. Many have already announced that they are setting aside large amounts of money to support businesses through the current crisis.

These may include things like:

• Short term support through reduced or deferred payments for commercial mortgages or other loans, with longer term support through extending the remaining term of their mortgage or loan, switching rates or switching part or all to interest-only arrangements;
• Support for customers with unsecured debt through reduced payments or breathing space to defer payments due;
• The option of a temporary increase in credit card and overdraft limits;
• Dedicated helplines; and
• One to one calls with your relationship manager

Your first port of call should be your relationship manager at your lender, who should be best placed to steer you in the right direction. It may be that you can get the help you need without having to resort to the government scheme.

Coronavirus Business Interruption Loan Scheme (CBILS)

CBILS became available on Monday 23 March and will offer access to loans, overdrafts, invoice finance and asset finance of up to £5 million for small to medium sized businesses (SMEs) who have encountered disruptions to cash flow because of the coronavirus pandemic.

CBILS was relaunched in early April following criticisms that not enough businesses had been able to access it, largely because the original criteria prevented lending to SMEs that would otherwise qualify for a normal commercial loan. The key changes (which are incorporated into this article) are as follows:

Personal Guarantees: Not permitted for loans under £250,000. For loans in excess of £250,000, banks may require a personal guarantee, but this must be limited to 20% of the amount of the loan remaining after the proceeds of business assets are applied.

Personal Residence: Your principle private residence cannot be taken as security for a loan or guarantee.

Security: Lending is now permitted under the CBILS even where the lender considers that the borrower would have sufficient security to secure a normal commercial loan.

These changes have been applied retrospectively. Where a CBILS applicant has instead been given a standard commercial loan, lenders have been asked to bring these facilities into the CBILS wherever possible. If this is what has happened to you, you should check with your lender whether your loan can now be transferred to the CBILS scheme.

You can also reapply for a loan where you have previously been rejected because you did not meet the eligibility criteria before they changed.

How it works

CBILS will operate for qualifying loans made in the six months from 23 March 2020.

It is free to access and works by the Government agreeing to provide a guarantee to lenders of up to 80% of the finance made available to a borrower under the scheme, making it possible for lenders to lend where they might not otherwise be able to BUT it does not change the fact that your business will remain liable to repay all the money that it borrows. If you are a sole trader or partnership, therefore, that means you will be personally liable. Borrowers are also able to request a Business Interruption Payment (BIP) from the Government. This is a grant payment to cover interest and costs applicable to a CBILS loan for the first 12 months. This is paid directly to the lender but it should mean that the borrower enjoys reduced costs for the first year.

There are 40 accredited lenders able to offer the scheme, including all the major banks.

A number of business finance facilities are available, including:

• Term loans
• Overdrafts
• Asset finance
• Invoice finance

Note: Not every lender can provide every type of finance listed.

CBILS – key features

CBILS temporarily replaces the Enterprise Finance Guarantee Scheme (EFGS), and relaxes a number of the eligibility criteria that applied for the EFGS. In particular, unlike EFGS, borrowers do not have to pay anything for the Government guarantee.

CBILS offers:

• First 12 months interest free – Government will make a Business Interruption Payment to cover the first 12 months interest and any lender fees, so reduced up-front costs and lower initial repayments;
• Loans of up to £5 million;
• Terms loans and asset finance available on terms from three months to six years;
• Terms of up to three years for invoice finance and revolving facilities;
• Loan guarantee for the lender of 80%, which could turn a “no” into a “yes” – but this guarantee is for the lender’s benefit only and does not relieve the borrower of liability under the loan.

Does my business qualify for CBILS?

The terms of, and eligibility criteria for, CBILS have already changed since first announced by the Chancellor and it is possible that further changes will be announced as the Government’s response continues to evolve in response to the pandemic. Our guidance will reflect changes as they are announced but please bear in mind that this is a fluid and fast-moving issue so you should always check the British Business Bank website.

A business is eligible for the scheme if:

• it is UK based, with turnover of no more than £45 million per year;
• at least half of its turnover comes from trade in the UK and the loan will be used to support trading in the UK;
• it has a borrowing proposal which, were it not for the coronavirus pandemic, would be considered viable by the lender. This will involve providing financial information about the business and your business plan and explaining how your business is impacted by coronavirus;

• it self certifies that it has  been adversely affected by coronavirus.

Businesses in most sectors can apply – there are some exclusions (including banks, public sector entities, schools, hospitals, fisheries and agricultural businesses), for more information see here.

Business Interruption Payment (BIP)

If you qualify for CBILS you will also be offered a BIP. The amount of this is calculated by the lender as the amount required to pay interest and costs in respect of the loan for the first 12 months. When you apply, you will also be sent a letter offering you the BIP which you will have to sign to confirm acceptance. The BIP is paid straight to the lender and is applied to satisfy those up-front payments. You should be aware that it may not cover break costs or early repayment fees if you repay the loan early, so you should pay attention to these.

How much can I borrow?

The maximum possible loan is £5million, but you will not necessarily be able to borrow that much because for each borrower it is capped by reference to an amount equal to one of the following:

• double the business’ 2019 wage bill;
• 25% of the business’ turnover in 2019; or
• the liquidity requirements of the business for the next 12 months (as certified by you).

The lender can decide which of these measures it wants to use.

For facilities with expiry dates before 31 December 2020, lenders have some discretion to lend above those thresholds.

There are adjustments for new businesses that do not have 12 months trading figures.

The £5 million will be spread across all your CBILS/EFGS loans so you will have to disclose any that you have already received as part of your application.

You can convert an existing EFGS loan to a CBILS loan, but you have to go through the CBILS application process in order to do so.

How does my business apply to access CBILS?

Again, talk to your relationship manager who should be able to help you and advise if you are eligible.

You can make an application direct to one of the accredited lenders. Most high street and challenger banks have rolled out CBILS on-line so this should be easy to find. We understand that lenders are experiencing high volumes of demand so applying online may be the best option.

The paperwork is almost identical to the EFGS. As with EFGS, there is a requirement to complete a Data Protection Declaration and an Information Declaration confirming the accuracy of financial and other information provided in your application.

How likely am I to be successful if I apply?

Decision-making on whether you are eligible for CBILS is fully delegated to the accredited CBILS lenders. These lenders range from high-street banks, to challenger banks, asset-based lenders and smaller specialist local lenders.

Lenders are no longer obliged to refuse access to CBILS where they could offer finance on normal commercial terms without the need to make use of the scheme.

The Government guarantee is designed to allow lenders to lend money to SMEs with viable business propositions. This means that the lender will still need to be satisfied that the business is viable and just needs cashflow help so that it is or will, with the benefit of the loan, be viable.

This means that you will need to provide certain evidence to show that you can afford to repay the loan. For larger facilities, this is likely to include:

• Management accounts
• Cash flow forecast
• Business plan
• Historic accounts
• Details of business assets

The exact requirements will vary from lender to lender and you should discuss them with the lender. For smaller loans, the process may be automated and therefore may not require the same level of documentation.

You can apply to more than one lender, just as with a normal commercial loan. As noted above, you can also re apply if you think you will now meet the revised criteria.

It is unclear exactly how lenders will apply the lending criteria under CBILS, although the recent changes are undoubtedly helpful. Early experience is that lenders are continuing to apply strict credit criteria in accordance with their pre COVID procedures and may be finding it difficult to assess how a business might have been expected to perform in the absence of the Pandemic, and, indeed, what actual future performance might look like given the uncertainty about how long the crisis will last. Lenders must still also consider affordability, responsible lending and other regulatory requirements, so the scheme is definitely not a “blank cheque”.

Although there is no formal appeal system, the Bank of England is encouraging Borrowers to feedback experience to their Local Agents, to enable them to identify trends and logjams. You can find your Local Agent here.

Will I have to give security or a personal guarantee?

Loans under £250,000 can be granted unsecured. Personal guarantees are not permitted for these loans. If you have already given a personal guarantee, the lender cannot make any demands on it.

Over the £250,000 threshold, CBILS obliges lenders to establish what is available as security and as such the business may be asked to create security over any assets it owns. Lenders may also request personal guarantees, but these must be limited so that the most that can be recovered is 20% of whatever remains outstanding of the loan after the other assets of the business have been used to repay the loan. So for example – if a business defaults on a £500,000 loan, at a time when the outstanding balance is £400,000, the lender must first recover what it can from the business and any security (say £200,000) leaving a balance of £200,000. It could then call on the personal guarantee for 20% of that amount or £40,000. Anything remaining after that would be covered by the 80% Government guarantee.

If your business has assets that can be given as security, under the revised scheme, a lender can still offer you a CBILS loan, even if it would otherwise have offered you a commercial loan.

You cannot be asked to give security over your personal home.

If you or your business already borrow from the lender and you have given security over your private residence or a personal guarantee in respect of that loan, you should ask the lender to confirm that the security or guarantee will not also be used to secure or guarantee the CBILS loan.

How long will it take?

There is no “fast track” approach at the present. Because lenders have to undertake their normal “Know Your Customer” and credit checks, experience is that loans are taking weeks, not days, to process.

There are a number of practical issues for lenders because they are having to put resources in place to deal with a vastly increased number of requests, while their take-on and credit processes are no less rigorous than they are for other types of lending. It’s also unclear how much resource lenders will have to dedicate to new lending propositions when they are also dealing with multiple variations to existing loans.

The process is likely to be quicker if you already have a relationship with your chosen lender and temporary overdraft or credit card lines might be easier to obtain in the short term while longer term funding is put in place.

Coronavirus Large Business Interruption Loan Scheme (CLBILS)

The CLBILS for companies with a turnover over £45,000,000 (note there is no upper ceiling) launched from Monday 20 April. It is similar in a number of respects to the CBILS but does have a few differences.

How much can I borrow?

• Up to £25m for borrowers with a group turnover of up to £250m; and
• Up to £50m for borrowers with a group turnover greater than £250m.

In each case the amount borrowed should not be greater than:

• double the borrower’s annual wage bill for the most recent year available, or
• 25% of the borrower’s total turnover for the most recent year available, or
• with appropriate justification and based on self-certification of the borrower, the amount may be increased to cover their liquidity needs for the next 12 months.

Am I eligible?

To be eligible for CLBILS a business must:

• Be UK-based in its business activity
• Have an annual turnover of more than £45 million
• Have a borrowing proposal which the lender would consider viable, were it not for the current pandemic, and for which the lender believes the provision of finance will enable the business to trade out of any short-term to medium-term difficulty
• Self-certify that it has been adversely impacted by the coronavirus (COVID-19)
• Not have received a facility under the Bank of England’s Covid Corporate Financing Facility (CCFF).

Differences between the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme

The British Business Bank has published a helpful table, which you can view here.

The Future Fund – the latest financial support for businesses during COVID-19

Last month the Government launched the Future Fund, a new programme of financial support for “innovative UK companies with good potential”. We look at how the scheme works and who might be eligible to participate.

The Future Fund became available on Wednesday 20 May and offers to match sums invested by third-party investors in eligible companies which may be struggling during the current economic disruption. The scheme is currently open for applications until the end of September 2020.

The Government is keen to ensure the UK retains its world leading position in science, innovation and technology and recognises that smaller companies in these industries may typically rely on equity investment and, being either pre-revenue or pre-profit, are ineligible for other COVID-19 financial support programmes offered by the Government to date.

It has therefore established the Future Fund scheme to make funding rapidly available to such enterprises to enable them to continue their growth trajectory and reach their full economic potential. Click here to access the British Business Bank’s website for full details concerning the Future Fund.

Key features

An investor or group of investors ready to invest in an innovative company can apply to have their sums matched by the Future Fund. On a successful application, the Future Fund, third-party investors and company receiving the investment will enter into a convertible loan agreement under which the agreed sums will be paid in cash to the company. Third-party investors invest on the same terms as the Future Fund and are not required to take an equity stake in the company.

Provided the company is eligible, the Future Fund will match up to 100% of the amount being lent by third-party investors. There is a cap of £5m per investee company, with a minimum requirement of £125,000. Investors may choose to lend above the cap, however these amounts will not be matched.

Applications are considered on a “first come, first served” basis, and the application process does not make any distinction on the size of investment.

At the present time, the Government has limited the aggregate amount available to the scheme to £250 million, and is keeping this amount under review. However, demand so far has been strong and it is anticipated that the Government will increase its commitment.

Participants in the scheme enter into a convertible loan agreement on standardised and non-negotiable terms provided by the Future Fund. Key features of the agreement include:

• The term of the loan is 36 months and cannot be repaid earlier other than with the agreement of all the investors;
• Interest accrues at a minimum of 8% per annum, but no interest is payable until the loan converts into equity;
• The loan converts into equity in certain circumstances, including an exit or a new funding round; and
• The proceeds of the funding must not be used to:

1. repay any borrowings from a shareholder;
2. pay any dividends;
3. pay any bonuses to employees, consultants or directors for a period of 12 months;
4. pay any advisory fees to corporate finance entities or investment banks.

Who is eligible for the Future Fund?

Eligibility criteria apply both to the investors and the company in which the investment is to be made.

Investors

Investors must fall within one of a number of categories to be eligible to participate in the scheme. These include, among others:

• Professional investors (both individual and institutional);
• High net worth companies, unincorporated associations and trusts;
• Certified sophisticated investors;
• Certified high net worth individuals; and
• The equivalent of the above according to the law in the investor’s home jurisdiction.

Definitions of the above investors are made by reference to certain laws, regulations and guidance relating to the provision of financial services in the UK. These should be consulted to determine whether an investor falls into the relevant category.

The Government also states that the total number of investors (including the Future Fund) should not exceed 149, to avoid the requirement to produce a prospectus for the financing.

Investee companies

The company receiving the investment must meet following criteria to be eligible for the scheme:

• The company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last 5 years (from 1 April 2015 to 19 April 2020, inclusive);
• If the company is a member of a corporate group, it must be the ultimate parent company;
• The company must not have any of its shares or securities listed on a regulated market, multilateral trading facility, recognised investment exchange or similar;
• The company must be a UK incorporated limited company;
• The company must have been incorporated on or before 31 December 2019; and
• Either 50% or more of the company’s employees are based in the UK, or 50% or more of the company’s revenues are from UK sales.

Although the Government describes the scheme as aimed at “innovative” UK companies, the scheme is open to companies operating in all sectors.

If a company has benefited from other forms of Government financial assistance relating to COVID-19, this does not exclude them from applying for the Future Fund.

How does the convertible loan work?

On a successful application, the company, investors and Future Fund will enter into a convertible loan agreement, under which the investor(s) and Future Fund will make unsecured loans in the agreed sums to the company on the same terms.

The loans will rank at the same rate with other unsecured debts of the company and will be subordinated to any secured debt.

The term of the loan is 36 months, during which time neither principal nor interest is payable by the company. Interest will accrue on the loan, the rate of which is to be agreed between the third-party investors but which cannot be below 8% per annum, but accrued interest is only payable under certain circumstances.

On maturity, the loans will automatically convert to shares in the company, unless the majority of the investors by value, or the Future Fund, choose to have the loan repaid instead. If the latter, the company must pay back the principal of the loan plus a premium equal to 100% of the principal amount (no interest is payable in this case).

This means that, at maturity, the company could be required to pay back double the amount originally invested. This would be equivalent to paying an annual compound interest rate of 26% over three years. The risk for the company, therefore, is if the third-party investors and/or the Future Fund decide they want their money back, imposing a very large liability on the company that would have to be refinanced and could adversely affect its value to other investors. It is to be supposed that the expectation is that the value of the investment at conversion will be sufficient to make this option unattractive to investors, or the Tax payer, but there is no guarantee that this would be the case.  This is likely to mean that only investee companies that cannot raise traditional equity from its backers will chose this option, and any investee should ensure that as little as possible is subject to the risks of the scheme.

If, on the other hand, the company experiences strong growth over the term of the loan and feels it is in a position to prepay some or all of the loans, it can do so with the consent of all of the lenders.

Any loans not repaid on maturity will convert into shares in the capital of the company. The company may choose to repay any accrued interest to investors in cash or convert the interest into shares. The Future Fund will then remain a shareholder of the company unless and until it chooses to dispose of its shareholding, which it may transfer to any institutional investor for any price and without being subject to any pre-emption rights.

The loans may also convert automatically into shares before the maturity date in any of the following circumstances:

1. The company undertakes further rounds of equity financing;
2. The business is sold, either by way of a share sale or asset sale; or
3. The company’s shares are listed for trading on a recognised investment exchange.

However, if, on an exit (that is, a sale of the business or listing of its shares), the lenders stand to receive less in cash than the principal loan sum plus the 100% redemption premium, they have the automatic right to repayment of these amounts in lieu of conversion.

The investors (and Future Fund) are also entitled to demand immediate repayment of the principal, unpaid interest and the 100% redemption premium on an event of default. The agreement contains the usual events of default that one would see in this type of loan, such as the company failing to pay debts as they fall due and other insolvency related events.

The agreement also contains an unusual provision that grants the Future Fund the option to require the company to repay the loan or buyback any shares the Future Fund holds in the company if it decides (in its absolute discretion) that it would be prejudicial to the reputation of the Future Fund or the UK Government to continue holding its loan/equity in the company.

We presume this might apply if the company carries on a line of business with which, for political reasons, the Government does not wish to be involved. However, it also raises the question as to whether this clause could also be invoked if the whole concept of the Future Fund becomes politically unacceptable and the Government decides to extract itself from all investments. The latter eventuality may be unlikely, but the discretion available to the Government under the wording in the agreement is wide.

Advantages of the scheme

• Quick access to funds – the application process appears to be relatively uncomplicated and efficient. The Future Fund requires certain information to be provided when the application is made and may request further evidence thereafter, however it will not be carrying out the extensive due diligence such an investment might elicit under normal commercial circumstances. This said, applications are expected to take a minimum of 21 days to process.
• Incentivise investors – the availability of the Future Fund may make the prospect of investing in a growing business more attractive for equity investors by reducing the amount of capital they need to put at risk.
• Favourable terms – provided that the investee company does not get into financial trouble or breach the terms of the convertible loan agreement, it may not have to repay any sums to the investors on maturity of the loan, instead converting all loans to equity.

Potential risks of the scheme

• Commercial terms – the Future Fund operates on a commercial basis and has the same rights to a return on its investment as the third-party investors. It should be noted in particular that interest is charged at a minimum of 8% and added to the amount of the loan on conversion, a minimum discount of 20% on the issue price of the shares is applicable on conversion, and, if the Loan is repaid, either at the election of the investors or on an event of default, all investors and the Future Fund are entitled to a Redemption Premium equal to 100% of the principal amount of the Loan. Although the scheme may enable quicker access to funding than an eligible company might otherwise achieve via commercial investors, the costs of funding may not necessarily turn out to be cheaper.
• Possible repayment on maturity – on maturity, the Future Fund or third-party investors may demand repayment of the loan plus the Redemption Premium instead of retaining equity in the company. If such an election were made, this could adversely affect the company’s financial resources and put the company at risk of insolvency. Although causing an investee company to enter an insolvency process is rarely a desirable outcome for investors, if the company does not demonstrate a positive financial outlook or growth potential at the end of the 3-year term, the Future Fund and/or investors may decide to pull out of their investment despite the impact on the company.
• Narrow eligibility criteria – although funding is available to companies operating in all sectors, the narrow eligibility criteria set by the Government may, in reality, substantially restrict the number of companies that might benefit. For example, the investee company must have already undertaken substantial equity funding in recent years, and, of course, one or more third party investors must already be lined up and ready to invest. This means that the fund is not an option for start-ups or first round investment companies.
• Legal costs – the Future Fund requires a company solicitor to be appointed to facilitate the payment mechanics on completion of the convertible loan agreement.

How we can help

The Future Fund programme is one of the more complex financial support schemes offered by the Government to companies contending with the current economic disruption.

Although the terms under which the convertible loans are made are non-negotiable, it may be worth obtaining legal advice to determine the rights and obligations on the parties involved, particularly concerning eligibility for the scheme and the effect of redemption and conversion of the loan.

It should also be noted that a director of the investee company, when making the application, must confirm that the company has the appropriate authorisations, waivers and approvals in place to fulfil its obligations in respect of the convertible loan agreements, including its ability to issue equity on conversion. We are able to advise on whether the relevant authorisations were in place, and if not, assist in making the necessary arrangements.

Finally, as already mentioned, the company receiving the investment is required to appoint solicitors to handle the distribution of funds on execution of the convertible loan agreement.

If you have any further queries on the Future Fund, please contact Kath Shimmin or Paul Duggan.

In the news

Lenders have generally welcomed the revamped scheme and said that it will help to speed up the flow of loan approvals.

RBS chairman Sir Howard Davies admitted there had been problems but said that he expects to see a “sharp increase” in lending to small firms in the next few days. “We’ve had good discussions with the Treasury and small firms, and I think the changes announced overnight will make a quite a big difference.”

For many the process is still slow as lenders must still comply with Know your Customer, regulatory and credit approval processes before they can lend. These delays can result in businesses failing before they can secure funding. There do not seem to be any proposals for simplifying these. Banks are, however, working to speed up the process but clearly this has to be balanced with the need to make sound lending decisions.

The hurdle that a business must still be a “viable lending proposition” puts funding beyond the grasp of some. Pressure is mounting to change the system – perhaps to the 100% guarantee scheme adopted in Germany. This might help, but arguably might also lead to a higher default and fraud rate if lenders are not at risk of loss.

One proposal which is gaining traction is to increase the guarantee scheme to 100% of loans under £25,000. This highlights another issue, which is that lenders are focussing on larger loans and some are not even offering loans below £25,000, possibly because of the administrative difficulties highlighted above, with the added complication that these loans fall within consumer credit legislation for partnerships and sole traders. In his announcement on Tuesday 21 April Chancellor, Rishi Sunak Ruled out a 100% guarantee  even on small loans – saying he is not persuaded it’s the right thing to do, but it’s something that business continues to press for.

Rain Newton-Smith (Chief Economist, CBI) commented in a CBI hosted webinar of 23 April, that while a 100% guarantee for smaller loans might mean that more risk is loaded onto the taxpayer through the guarantee scheme, this may be a risk worth taking to achieve the objective of getting as many businesses as possible through the crisis.

Recent news suggests that the Treasury is considering offering 100% guarantees on loans up to £25,000 for “micro businesses”. According to BBC business editor Simon Jack, eligibility for loans has not yet been decided – namely, how small does a business have to be to qualify for a loan for which the lender gets a 100% guarantee. As many as one million of the UK’s smallest businesses, employing no more than 10 workers, could benefit from the new rules, analysts say. These include shops and pubs, which have been forced to close under coronavirus lockdown measures.

An announcement is expected next week, if not earlier.

The approach of lending to cover cashflow losses points up one of the biggest difficulties of the scheme, which is that many businesses whose cashflow has completely dried up do not apply for a loan because they do not see any prospect of being able to repay it, however good the terms, especially in the light of the dire economic predictions being aired in the press.

In the large corporate space, anecdotally take up is expected to be lower, because companies in this bracket are expected to be more likely to be already leveraging existing relationships

More Information

• British Business Bank FAQs
• FAQs for Businesses: Coronavirus Large Business Interruption Loan Scheme

These are updated from time to time to address issues as they are identified so it’s worth checking back regularly.

Blake Morgan is standing by to help – please contact Kath Shimmin or Paul Duggan.