Advice for Companies and Directors from Antony Batty & Company
In a recent article we commented that during this current crisis it was important for companies and directors not to panic, but to act quickly and decisively to take action that could well save their businesses. Far easier said than done, but as we were writing those words (on Friday 20th March), the Chancellor announced his 80% wages cover scheme for employees. This was followed yesterday (26th March) with a similar package for self-employed people based on their average earnings over the past 3 years. We expect more announcements.
All positive news, but as ever the devil is often in the detail. So, as part of our on-going ‘advice’ series of articles, we wanted to focus on the Government’s Coronavirus Business Interruption Loan Scheme (CBILS). Most businesses will know what it is by know, but they might not know all the conditions (including the required security, such as personal guarantees, that some lenders are asking for) and what that might mean for directors in the future. In this article we’ll summarise what some of those conditions are, but first, a short recap.
What is the CBILS?
Set up by the British Business Bank, CBILS is there to support Small and Medium sized businesses and help them successfully apply for loans from lenders that will ease them through the disruption caused by the Coronavirus crisis. There are currently over 40 lenders, from high street banks to smaller specialist local lenders, who have already started offering CBILS loans or are in the process of doing so.
In summary:
- A lender can provide a loan of up to £5 million – the loan is available on repayment terms of up to 6 years. It is important to remember that the borrower remains fully liable for the debt.
- The loan will be in the form of term loans, overdrafts, invoice finance and asset finance.
- The government will give lenders a guarantee of 80% of each loan, to back loans of up to the maximum £5 million, and it is this guarantee that is expected to ‘get lenders lending.’ It is understood that there will be no charge for providing this guarantee.
- The Government will make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied charges. In effect this means that the first 12 months will be interest free.
- To be eligible, a business must be UK based with a turnover of no more than £41 million.
- Loans in the scheme are limited to a maximum of 25% of 2019 turnover or double the annual wage bill, whichever is greater.
- Payment holidays of up to 12 months are also available meaning nothing to pay for 12 months.
The Scheme has Been Available Since 23rd March. What do Individual Schemes Look Like?
We are aware that all the big high street banks have their packages in place, which may differ slightly, but they all must follow the parameters as laid down by the British Business Bank.
A key element of the CBILS packages being offered by banks is that applicants must demonstrate that the business is viable, other than the interruption caused by the Coronavirus. A typical rule of thumb we have seen mentioned is that if an applying business was a strong business in 2019, then it is likely the business will be strong post Coronavirus and will therefore stand a good chance of applying successfully. This means of course, that not all businesses will be successful in applying, especially if they were already in financial difficulties in 2019.
Most banks are offering CBILS from £25,001 up to £5m, but security is being required, as these tiers from one of the high street banks show:
- £25,001 – £100,000 – Secured by short form guarantee.
- £100,001 – £250,000 – Secured by short form guarantee and debenture.
- £250,001+ – Personal guarantee, debenture and tangible security.
What About Security?
Perhaps the key issue here is the guarantees, short form or personal, that are required as security, dependent upon the size of the loan. A Short Form Guarantee Agreement is a legally binding document that allows for one party to agree to assume liability for the obligations of another under a separate agreement. For example, the Creditor/Lender in a Loan Agreement may require the Debtor/Borrower to provide a Guarantor before financing the loan. A Personal Guarantee goes further. A personal guarantee is an individual’s legal promise to repay credit issued to a business for which they serve as an executive or partner. Providing a personal guarantee means that if the business becomes unable to repay debt then the individual is personally responsible.
Regarding security for the loan, The British Business Bank states:
- If a lender can offer finance on normal commercial terms without needing to make use of CBILS it will do so
- The lender can choose to use the scheme for unsecured lending for loans of up to £250,000
- For facilities above £250,000, lenders must establish that the borrower is unable to provide security before it uses CBILS
These statements appear to be somewhat at odds with the requirements of some lenders for security as detailed above, which backs up our initial point that the devil is in the detail, or at least the lenders’ interpretation of the British Business Bank’s wording. The word choose and the phrase must establish appear to have been replaced by the phrase security will be required, at least in this instance. At the very least, it appears that lenders have discretion over the security they require.
We are aware that some other banks/lenders are not asking for Personal Guarantees, so it will pay directors to look at the whole marketplace to get the best deal they can. As things stand, however, it appears that CBILS are not unsecured lending and for that reason CBILS are not without their risks for companies and directors.
As a result of this requirement for security, particularly Personal Guarantees (with which if a company becomes insolvent the lender can come after a director’s personal property), the banks and lenders have come under fire from company directors and MPs.
Talk to us for Help and Advice on CBILS
Our insolvency practitioners and restructuring experts here at Antony Batty & Company have a great deal of experience in helping businesses secure loans and finance. CBILS is one of a range of packages to help businesses through the current crisis. If you need help and advice in choosing which help package to choose and how to get the best one for your business, please contact us or call us on 0208 088 0633.
