Why the CBILS is not businesses’ only option

29/04/2020

Of all the support measures announced by the government to help businesses and families cope with the impact of the COVID-19 pandemic, the Coronavirus Business Interruption Loan Scheme (CBILS) is arguably the most controversial.

In providing lenders with a government-backed guarantee of up to 80% of the outstanding balance of facilities provided through the scheme, and with the government making a Business Interruption Payment to cover the first 12 months of interest payments and any arrangement fees on those facilities, it was hoped to increase the supply of credit to businesses most affected by the pandemic and lockdown.

More than one month after being introduced, however, and despite several modifications being made, not only is there widespread criticism regarding the terms and availability of the scheme, there are also questions about whether it even represents the right approach for businesses.

What are the limitations of the scheme?

Much of the focus has centred around the approval rate of new facilities under the scheme. The latest figures from UK Finance, at the time of writing, indicate that 46% of formal applications have so far been approved, with 16,600 companies benefiting from £2.8 billion in new lending.

In Germany, however, their equivalent scheme has a 98% acceptance rate.

Some countries’ governments are guaranteeing up to 100% of the loans, which critics argue would increase the number of businesses able to access funding though the scheme if applied in the UK, too. Although the chancellor, Rishi Sunak, has done that for loans of up to £50,000 through the new Bounce Back Scheme, he has dismissed doing the same for the CBILS.

When combined with the fact the borrower remains 100% liable for the debt, the result is that lenders must still apply their usual underwriting criteria and take affordability of repayment considerations into account. This is because, should the business fail, they would need to follow their usual commercial recovery procedures – and incur the costs of this – before being able to make a claim under the government’s guarantee.

This all makes for quite an ask from the small number of designated lenders, especially when there is now the added challenge of no personal guarantees on facilities up to £250,000, following recent revisions to the scheme.

Whilst those advocating the removal of personal guarantees were considering the upside for the borrower, this didn’t account for the double-edged sword – in that increased risk and insufficient security for the lender may reduce approval rates.

So it shouldn’t come as much of a surprise that some accredited lenders are only supporting their existing customers at present, and no longer accepting applications from non-clients. The reason for this isn’t a lack of empathy, but simply placing their customers at the centre of their focus, given the high volumes of requests being received.

According to moneyfacts.co.uk, around one in three of the lenders providing the CBILS are only open to existing clients, and if an application is rejected it’s very difficult to get approved elsewhere under the scheme.

So what are your options and alternative solutions?

If your business would benefit from funding under the CBILS and you meet the eligibility criteria, then the first step would be to approach your existing lender and explore whether they can help.

The important thing to remember, whether you’re eligible or not – or approved or not – is that the CBILS may not represent the right option for your business, particularly over the medium to long term.

One of the biggest challenges facing businesses currently is that the future is still so unclear. We still have no idea of when lockdown restrictions will be eased or lifted and how long the process will take before conditions can return to anything close to normal – and what the new normal will be.

So securing a new loan or overdraft through the scheme for a short-term fix, thereby increasing the business’s level of borrowing, can be risky. Should conditions similar to today’s be prolonged, will the business be able to afford to repay the loan, and what about its ongoing cash flow needs?

Every business is, of course, different, and there will be many who will benefit greatly from a fee-free, 12-month-interest-free loan to help them overcome the initial shock of the pandemic and recalibrate.

For some, though, the risk is that the CBILS will only serve to push the challenges back a few months – and then add to them when interest kicks in after 12 months.

It is this balance that businesses must get right, whilst remembering that there is a huge range of commercial finance products and lenders not included in the government scheme that could support the business’s cash flow over the short, medium and longer term. The good news is that the CBILS is only one option amongst the wide range of facilities and solutions designed to support businesses.

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Hilton-Baird Financial Solutions is an independent and award-winning commercial finance broker, with 23 years’ experience of introducing businesses to the most suitable funding facilities and lenders on the market. For a free, no obligations chat with one of our expert team, call 0800 9774833 or request a call back at a convenient time here.