Shaun Fooy, the British Business Bank’s UK network manager in the northeast, explains what businesses should consider as they weigh up taking a coronavirus loan
- Business owners must pay attention to the differences between each of the loans on offer, and weigh up the level of debt they can take on in their own individual circumstance
- Unlike Bounce Back loans, the repayment holiday for CBILS is at the discretion of the lender
- Guarantee rules differ between loan schemes, and depend on the amount borrowed
Credit lending in a crisis
The pandemic has changed my day job at the British Business Bank. I’m now helping our accrediting lender for the coronavirus business interruption loan scheme (CBILS) programme through the crisis, in a period of time that’s seen us launch four new funds in six weeks. (We’d usually launch two or three in a year).
I want to discuss the three main funds that we’ve launched; the Bounce Back programme that started on 4 May, the Future Fund, and CBILS. There are differences between the three programmes that founders must keep in mind.
Bounce Back or CBILS?
Bounce Back is our most recent programme, having opened a week ago. It’s a kind of package product, aimed at the early stage and smaller businesses that might have a turnover of less than a million. Some were perhaps struggling to access CBILS, the programme that came in earlier.
The critical thing to note about the Bounce Back programme is that unlike CBILS, it’s a 100% guarantee. If a business was in existence on 1 March 2020, and was not classed as a business in difficulty, then it should be able to secure a loan under this programme. If a business can definitively prove that it has been affected by Covid-19 then it should be able to access the scheme. The loan amount depends on the business’ turnover – a maximum of £50,000 or 25% of turnover, whichever is lower.
There’s not really a credit decision for the lender to make, beyond typical know your customer (KYC) credit checks if you’re not an existing client of theirs. Essentially, it’s 100% guarantee with a six-year term as a maximum and a fixed interest rate at 2.5%. There are no fees to pay in the first 12 months, as they’re covered by a business interruption payment.
As things stand, CBILS is open until 30 September. Our understanding is that if you have agreed a facility with your lender but not yet drawn it, the latest you can draw it is three months after that date – the end of December this year. Bounce Back loans are running until the end of November at the moment, but that is subject to review.
Keep track of guarantees and repayment holiday rules
CBILS really covers more established businesses, offering loans from £50,000 to £5m. Unlike the Bounce Back scheme, a CBILS loan guarantee is 80%.
Personal guarantees depend on how much you’re borrowing. If it’s less than £250,000 then you don’t need to give a personal guarantee. The key thing to bear in mind is that the lender can take up security at its own discretion – like a debenture over company assets. Above £250,000 the guarantee is the same but the lender has the option to take a 20% personal guarantee. If a business were to fail then the lender would look at the company security first, the personal security second, and the CBILS guarantee third.
Like the Bounce Back scheme CBILS also has a six-year term and no fees to pay in the first 12 months, but it’s key to remember that the repayment holiday for CBILS is at the discretion of the lender. Businesses assume that the repayment holiday is automatic but it’s important that they ask at the outset. If you’re a business that’s been impacted by COVID and you have little or no turnover, consider how you would make those repayments. Using the borrowed capital itself to repay it would slightly defeat the point.
It’s also crucial to bear in mind that not every lender is accredited for every variant of CBILS. There are four variants; the traditional loan facility, an asset finance term, but also invoicing finance and what they call a revolving credit (or overdraft). If you go onto the British Bank’s website you can break the search down by region, per type and per variant and find the actual lenders who offer what you feel is best for your business at that moment.
The Future Fund
This is due to launch in May, and is essentially a package of funding of around 1.25bn to help businesses in the tech space. Of that funding, 750m sits with Innovate UK, and the rest is divided equally between government cash and private investor cash.
It’s aimed at catching businesses that might be pre-revenue and still developing, or post-revenue and loss-making (and therefore unable to secure a CBILS loan). It’s a fully commercial facility and has match funding in place from private investors, although these haven’t yet been named.
A future fund loan is done as a loan note, which is an instrument that gets money to a business quickly without a valuation. The money must then be used for working capital, and can’t be used for repaying other debt.
It’s a debt tool, but ultimately convertible into equity.
What should founders keep in mind?
I’ve heard from many of the corporate finance teams that I work with that customers have agreed a facility with their bank, but haven’t yet drawn it. They want a backstop. They might already be using other government schemes, perhaps furloughing staff through the job retention scheme. The difference with these business loans of course is that they are still debt, which ultimately must be paid back.
We saw a headlong rush into CBILS in the first days of the scheme, but since then I’ve seen more businesses slow down and not draw the full amount of an agreed CBILS facility immediately. Businesses should also be careful that they’re only taking a loan for an amount that they really need, rather than more because it’s on offer. It’s absolutely critical that you work through your numbers first.
I would always stress that founders should ask whether a loan of this size is right for their business at that time. These aren’t repayable grants, but loans which attract interest over time.
Every business is different and its needs will be different – but always bear in mind how much debt your business really can take on.