Coronavirus Large Business Interruption Loan Scheme – is it suitable for your business?

HM Treasury and the British Business Bank announced further details of the Coronavirus Large Business Interruption Loan Scheme (CBILS+) today, which is due to launch on Monday 20 April 2020.

The latest details provide some helpful clarity on the terms of the loans being made available and the eligibility criteria. We expect further information to be provided in the coming days and there are likely to be more issues identified once the scheme is live, so please check back for further updates.

How does CBILS+ work?

Lenders that are accredited with the British Business Bank for the CBILS+ scheme will provide eligible businesses with term loans, revolving credit facilities (including overdraft facilities), invoice financing or asset financing.

The lender will receive a government-backed guarantee for 80% of the outstanding balance of the facility. Businesses will still remain liable for the total amount that they borrow and for all interest and fees charged by the lender.

How much can a company borrow under the CBILS+ scheme?

The maximum loan amount will depend on the turnover of the business. For businesses with an annual turnover between £45m and £250m, the maximum loan amount will be £25m. If annual turnover is above £250m the maximum loan amount will be £50m.

There is no published guidance on how annual turnover is to be calculated, but we assume that it will be the same test as for the smaller Coronavirus Business Interruption Loan Scheme (CBILS), which is annual group turnover calculated for the 12 month period ending on the date of application for a loan.

While the above loan amounts are the scheme limits, lenders will not allow businesses to borrow more than either:

• double the annual wage bill for the most recent year available, or
• 25% of the company's total turnover for the most recent year available.

With appropriate justification, lenders may increase the amount borrowed to cover liquidity needs for the next 12 months. It is unclear what "appropriate justification" will look like, save that businesses will have to self-certify that there is such justification for lenders to increase the amount to be borrowed.

Why would a business seek to borrow under the CBILS+ scheme?

Unlike the smaller CBILS scheme, the UK Government will not be covering any interest costs under CBILS+ loans. So what is the advantage to businesses of applying?

The aim of the CBILS+ scheme is to encourage lenders to keep on making financing available to businesses that are in difficulty as a result of the COVID-19 pandemic. Businesses that are in financial difficulty as a result of the pandemic and that need additional liquidity to help protect jobs and ensure their ongoing viability are more likely to be able to borrow, as lenders have the benefit of the 80% guarantee from the Government.

Other than the fact that the maximum loan term cannot be more than 3 years, the terms of each loan are subject to commercial negotiation between the lender and the borrower. This means that there is no limit on the interest rate that a lender may set. However, guidance issued by the regulators to the UK banks has encouraged them to be supportive of businesses during the ongoing pandemic, so we would hope that interest rates are not prohibitively high.

Is my business eligible for a CBILS+ loan? 

There are certain eligibility criteria that must be met in order to access the scheme.

• Borrowers must have UK based business activity: There is no additional clarity on what being "UK based" means but there will be a need for some sort of meaningful business presence in the UK. The mere fact that a business has an overseas parent company or overseas investors does not render it automatically ineligible.
• Businesses must have an annual turnover of more than £45m: As stated above, we expect this to be annual group turnover calculated for the 12 month period ending on the date of application for a loan. When initially announced, the scheme had an upper limit of £500m. Thankfully, this has now been removed, as it will ensure that the scheme is accessible for all companies regardless of group size. This will be a particular comfort for those businesses backed by private equity or venture capital funds, as there has been some concern that a turnover test which aggregated all portfolio companies under these entities would cause significant numbers of businesses to be ineligible by virtue of their deemed "group" turnover exceeding the initially proposed upper limit.
• Businesses must be able to certify they have been adversely affected by the COVID-19 pandemic: Any company that has not been impacted financially by the current situation will not be eligible for a loan.
• Any business seeking to apply must have a borrowing proposal which, but for the COVID-19 pandemic, the lender would consider viable; additionally, the lender must believe that the loan will enable the business to trade out of any short-to-medium term cashflow difficulty, and if the facility is granted, the borrower is not expected to go out of business in the short-to-medium term: The only guidance to lenders is that they need to reasonably believe that the loan will help that business, and that the borrower is not going to become insolvent in the short-to-medium term. We will need to wait to see how lenders interpret this and what information and confirmations they will need businesses to provide to allow the lender to make a reasoned determination.
• Businesses cannot have accessed the Bank of England's COVID Corporate Financing Facility (CCFF): The guidance does not confirm whether another company under the same ultimate control as the borrower can have accessed the CCFF scheme.

Businesses that operate in nearly any sector can apply for a loan under the CBILS+ scheme. The only exceptions are credit institutions, building societies, insurers and reinsurers, public-sector bodies, grant-funded further-education establishments and state-funded primary and secondary schools.

Will a business have to grant security for a loan?

The expectation is that lenders will ask for the same security package that they would have asked for if a business was applying for a commercial loan prior to the COVID-19 pandemic.

The only restriction is on the grant of personal guarantees, which are not permitted under the CBILS+ scheme for loans under £250,000. If a personal guarantee is required by a lender for loans above £250,000, the maximum liability under the guarantee is 20% of the losses under the facility after all other recoveries have been applied.

If businesses have already granted security under an existing loan facility or pursuant to commercial facilities, it is unclear whether lenders will accept second ranking security for a CBILS+ loan. If they are, it is likely that the interest rate for the loan will be considerably higher.

If not, businesses will have to think about whether to approach existing counterparties to see if they will agree for the CBILS+ loan and security to rank ahead of them. This will be less of a concern if the CBILS+ lender is the same as the business' existing lender.

How can a business apply for a CBILS+ loan?

Loans will be administered from Monday 20 April by lenders that are accredited by the British Business Bank. There are currently no details as to which lenders are accredited, but we expect the list to include all of the UK high street banks and a number of the lenders that are already accredited for the CBILS scheme. Given the lack of information to date, it seems unlikely that the CBILS+ scheme will be fully operational when it launches on Monday 20 April.

Once the scheme is open, businesses will have to approach accredited lenders individually to check if they meet the eligibility criteria and to discuss the terms on which that lender is willing to make a loan available. If a business already has a relationship with an accredited lender, we would suggest that they approach that lender first as they will have a better understanding of the business and the difficulties it is facing.

As we have seen with the CBILS scheme, some lenders are only accepting applications from existing customers and we expect the same approach to be adopted for the CBILS+ scheme. There is no restriction on how many lenders can be approached for a loan and a rejection by one lender does not preclude businesses from obtaining a loan from another lender.

Once an application has been accepted for a CBILS+ loan, businesses should not expect to receive funds quickly. The process will be the same as for any commercial loan, with loan terms having to be negotiated and "know your customer" checks carried out.

While lenders will, of course, seek to make the process as smooth and efficient as possible, it is still likely to take a number of weeks. We would hope that the process would be slightly quicker if a business is looking to borrow from its existing relationship bank.