Kirsty McGregor, founder of The Corporate Finance Network, representing some of the UK’s most proactive and commercially astute regional, independent accountancy firms, has given her reaction to the changes brought in to amend the Coronavirus Business Interruption Loan Scheme by the British Business Bank, which are:

1. Changes have been announced to take effect from Monday 6th April but need to be applied retrospectively to any offer made since 23rd March 2020

  • Most banks will now need to use their resources to amend previous offers and applications.  Much time and resource has been wasted already whilst banks and lenders attempt to run this scheme, which was doomed to failure from the beginning.
  • On 18th March, I wrote to Parliament to explain why I didn’t think that this scheme in its original form was going to be an appropriate product for most SMEs.  It is disappointing that it has taken over two weeks for that to be recognised. Thousands of SMEs have already taken the decision to go into liquidation and how many jobs have we lost during that time?
  • I would question the expertise of the advisory team behind the Chancellor and the Treasury. What experience do they have in matters relating to SMEs?

2. For facilities under £250,000, use of personal guarantees not permitted under the scheme

  • This stricter requirement will mean that any second tier lender or fintech (Funding Circle for example) will now struggle to be part of the scheme, as the only security they could have taken would be a Personal Guarantee.
  • Whilst I think that this is a welcome move for the tier 1 banks, I feel it removes the chance for bringing more liquidity and speed into the market.  Funding Circle would have been able to issue much quicker loans at smaller levels. I don’t think this amendment has been fully thought through as it has taken competition in our SME banking markets back ten years.

3. No requirement to look at other commercial loans first

  • This is a welcome amendment and will streamline applications for banks, as long as lenders are also recognising that interest rates will need to be at reasonable rates.
  • The original thinking in the idea of banks looking to the suitability of their commercial products first, was because they could have been cheaper.  This removes that option, and whilst it brings much needed speed into the application process, banks must have also been asked to offer terms at reasonable rates, nearer 3%- 6% over base, than the originally quoted 20% and 30% offers which were being discussed in the earliest days of the scheme.

4. Viability assessment unchanged but for small loans this determination could be based on the lenders’ internal credit models

  • This will hopefully mean that detailed cashflows are no longer required, and instead banks can utilise their own assessment of the customer based on their previous management of their existing facilities, for example the flow of money through their bank accounts and whether they keep within their overdraft facilities, make their loan repayments on time etc.   All lenders score customers’ performance based on their banking activity, on a regular basis.
  • This is a welcome amendment to allow for faster processing of applications, but I would still encourage all business owners to prepare and update their cashflow forecasts, so that they can be sure they can still afford the repayments and interest when they become due.
  1. Insufficient collateral requirement removed, allowing those SMEs who are considered to have sufficient collateral to access CBILS facilities; but: Note 1 to the release says: “Please note that where there is sufficient security available, it is likely that the lender will take such security in support of a CBILS facility”
  • So whilst this does now open up the scheme to allow banks to use it for customers who would previously not been able to access it, because they had other security, it does not mean that the facilities will be unsecured, even for facilities less than £250k.
  • The owners or directors will no longer have to give Personal Guarantees, as explained above, but the business will still have to provide a charge over other security, most likely in the form of a fixed and floating charge and debenture, if it is a limited company, or charges over specific assets for unincorporated businesses.
  • The banks may be minded to encourage the use of CBILS in conjunction with Invoice Finance facilities, to enable them to secure a higher % of security over the book debts (based on changes to UK legislation since Brumark/Spectrum Plus rulings c.2005.) Book debts cannot now be said to have a fixed charge, and therefore to be more preferential than a floating charge, unless the debtors are managed in a separate bank account, such as in a factoring or invoice discounting facility)

Finally, it has been seen that the maximum facility previously being offered by tier 1 lenders was a maximum of 25% of 2019 turnover or 2x annual wage bill, whichever is greater.  There is no mention in the latest release if this is still part of the guidance for lenders.  This can be restrictive for some of the smallest businesses when the minimum loan offered by some lenders, including Barclays Bank, is £25,001.

Owner directors of the smallest limited companies, such as contractors and freelancers who take a mixture of salary and dividends for their earnings, may feel that these amendments have not considered their needs yet again.

Whilst all of these changes to the scheme are on the whole welcome and will make loans easier to access for many SMEs, I am still concerned that the Government is still encouraging, in fact expecting, SME business owners to load their business with debt.

As much as the commitment from the Treasury to cover the first 12 months interest and fees is appreciated, and even some lenders are offering capital repayment holidays for six or twelve months, businesses will still have a huge revenue decline and lack of profitability in businesses over this period, and leveraging a company now will only put more strain on their cashflow into next year.  Any recovery later this year will have to be used to service this debt later and will extend the pressure on businesses for longer.

There are other potential solutions to support SMEs and details of these alternative suggestions were passed to the Treasury in an email by Jason McCartney MP on 2nd April 2020.

McGregor concludes “The emphasis should always be on saving jobs, so if business owners don’t want to continue to trade, they should be able to, whilst looking after the employees at all times.  And the other smaller businesses who do wish to continue in business, should be supported, without the need to take on the stress of more debt.

“I hope the Chancellor and his team will consider what further support can be offered, and make some swift announcements, before many more business owners take matters into their own hands and make decisions which are irreversibly and potential catastrophic for the UK Economy.”

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