It is inevitable that many businesses will suffer a loss or reduction in revenues whilst the UK is in lockdown and many customers will look for more preferable payment terms. The UK Government has undertaken to support the UK economy with a series of measures having been introduced in March 2020 in an attempt to keep as many businesses afloat as possible, retain jobs and to minimise the economic impact of the pandemic. Amongst various other measures being taken by the UK Government, help is available to eligible businesses in the form of the Coronavirus Business Interruption Loan Scheme and the Covid Corporate Finance Facility.
The Coronavirus Business Interruption Loan Scheme (CBILS)
The Coronavirus Business Interruption Loan Scheme is a short term government backed loan scheme which was launched on 23 March 2020 aimed at helping smaller to medium sized businesses with an annual turnover of up to £45,000,000 who are experiencing cash flow difficulties as a result of the coronavirus. Changes to the scheme were announced on 3 April 2020 to enable further businesses to take advantage of the scheme's offering following criticism that many businesses did not qualify for assistance under the scheme (and were not eligible for assistance under the Covid Corporate Finance Facility, which I discuss below, either). The scheme is being delivered by the British Business Bank and has been launched to help businesses access funding support of up to £5,000,000 by way of term loans, overdrafts or asset and/or invoice finance products. With effect from 6 April 2020, the key features of the CBILS are:
- to qualify for the scheme, borrowing businesses must be based in the UK and must have been viable prior to the scheme being established and their financial difficulties must be related to the coronavirus. Applicants can self-certify that their businesses have been impacted. Excluded from the scheme are businesses which were "undertakings in difficulty" within the meaning of Article 2 (18) of the Commission Regulation (EU) No 651/2014 of 17 June 2014 as at 31 December 2019. The "undertakings in difficulty" test includes businesses which have accumulated losses greater than half of their subscribed share capital as at 31 December 2019, as well as businesses that entered into insolvency proceedings or fulfilled the criteria to be put into insolvency proceedings, businesses that have previously received rescue aid that is yet to be reimbursed or restructuring aid and are still under a restructuring plan, and businesses that are not SMEs and that have fallen below solvency ratios for the previous two years in each case, as at 31 December 2019, so this will affect a lot of start-ups and any businesses which simply had a "bad year" but are otherwise financially sound (under normal circumstances);
- repayment terms of up to 6 years (or 3 years in the case of overdrafts and invoice finance lines) are available;
- the loans are 80% government backed so initial repayments should be lower than might otherwise be the case. The borrower remains liable for 100% of the loan but the lender benefits from a guarantee from the UK Government for up to 80% of the indebtedness;
- fees may be paid by the lender directly (and some of the 40 lenders participating in the scheme have indicated that they will not charge arrangement or early repayment fees);
- interest and fees could be paid by the government for up to 12 months so the borrower may benefit from no upfront fees and costs;
- lenders cannot insist upon personal guarantees for loans below £250,000. Lenders may use their discretion in relation to guarantees and security for loans above that amount but enforceability restrictions apply should they do so;
- assistance from the scheme is available even if lenders would be willing to provide funding on the basis of their normal commercial terms without the benefits of the scheme (this is one of the changes introduced on 3 April. Prior to that CBILS was only available if a lender would not be willing to provide funding against its usual credit criteria); and
- if a borrower has borrowed a loan from a CBILS lender on that lender's normal commercial terms because they did not previously qualify for CBILS, that loan can now be refinanced into the scheme. So those businesses who were previously unable to take advantage of the government funded 12 months' interest and low initial repayment costs can now do so.
COVID CORPORATE FINANCING FACILITY
But what if your business is a much larger organisation? Help may be available under the Covid Corporate Financing Facility.
Under the Covid Corporate Financing Facility, the Bank of England will purchase short term Sterling debt in the form of commercial paper from larger organisations to support liquidity. This scheme is aimed at businesses which are making a material contribution to the economy and which satisfy the Bank of England's eligibility criteria. The scheme is not open to banks, financial institutions, insurance companies or building societies regulated by the FCA and governmental or public bodies also do not qualify. To be eligible to participate in the scheme, companies must have been of sound financial standing prior to the coronavirus pandemic and must meet certain credit rating criteria. The minimum amount the Bank of England will agree to purchase under the scheme is £1,000,000. Companies do not need to have issued commercial paper before in order to take part in the scheme and those wishing to do so now should speak to their bankers - not every bank will issue commercial paper on behalf of a company, but some do, and it is worth exploring this option with existing bankers where businesses are eligible.
Whilst these Government measures might offer some relief for borrowing businesses, the strength and importance of existing banking relationships should not be underestimated. Regardless of eligibility for assistance from either of these schemes, borrowers should speak to their bankers if they have concerns about their short term financial condition - existing lenders might agree to amend existing loan terms, to restructure current facilities, to provide additional financial support without the need for new security and/or waive any event of default or potential event of default which occurs or might occur (borrowers should bear in mind that the pandemic and any (even apparently minor) impact on their financial condition might trigger an event of default under their facility documentation when all wider circumstances and the impact on any particular borrower are taking into account by a lender). If existing lenders can't provide an arrangement that works for the borrower, and the borrower does not qualify for support under these schemes, borrowers should bear in mind that interest rates are very low just now - other commercial lenders might well be able to put together a new funding package that better suits their needs.
Other Government help and relief is available. Morton Fraser has a dedicated Coronavirus Advisory Group on hand to offer support when you need it - further advice and contact details can be found on our website.