Inevitably there has been some confusion over the loan scheme introduced by the Government to help businesses affected by the Coronavirus, so here is the latest position is on bank funding – what the scheme is NOT for, how long it takes to get money, interest rates, what information you have to provide, what security you will need provide,

Firstly be aware that lenders are completely overwhelmed with funding requests and are themselves dealing with staff shortages due to sickness. They had no more notice of the scheme than the rest of the country and for most of the high street banks their infrastructure to deal with small businesses has largely been dismantled in recent years. The experts I’ve spoken to have not seen many loans approved yet, which mirrors the experience of my clients, but to be fair it is very early days.

What the scheme is NOT for

Secondly you need to know what this scheme should NOT be used for, what will NOT be considered and when you should NOT apply.

• If your business wasn’t viable before this happened, based on your 2019 accounts, then you won’t be eligible now
• You CANNOT use this to top up your cash
• You CANNOT use this to create a cash buffer
• You CANNOT use this to put in Premium bonds (as I’ve heard a lot of people say)
• You CANNOT request a lump sum “just in case” without a clear business case showing the need (again some people have been suggesting this)
• If you can’t repay it back within 6 years, then you won’t not get the funding

Please don’t apply for any of these reasons. You’re just clogging up the system and stopping people who really need funding from getting it.

About the Scheme

The scheme is replacing the EFG – Enterprise Finance Guarantee scheme. This is not a “bail-out-for-all” scheme and normal bank lending criteria apply. You will only be considered for this scheme if you have explored ‘business as usual’ lending first.  If you qualify for ‘normal’ lending then that is what you’ll be offered. The CBILS is for where the loan is possible but lacks sufficient security for the lender.

The loan size is capped at the higher of 25% of your normal annual turnover, or 2 x your annual payroll. For small owner managed businesses that may be a very small amount

Security
There was a lot of furore last week about security and personal guarantees but the current position is that the high street banks will NOT ask for personal guarantees  for any loan under £250,000 that is covered by the scheme. If you qualify for ‘normal’ lending, however, then you may well be asked for a personal guarantee

Lenders will look for any security in your business and expect this to be offered. In the event of you defaulting on the loan later they need to collect on any security available before they draw on the government guarantee.

2^nd tier lenders are likely to want personal guarantees.

Interest rates
For a high street bank the lowest rate you can expect is around 3% over base rate, rising to a maximum of around 7% for a higher risk lend.  When you look at alternative 2^nd tier lenders you’re going to be starting at 12%, rising to around 16%.

Once you go beyond this you’re into high risk expensive money, and the recommendation is that you don’t go there. If a bank won’t lend you the money you need there is usually a very good reason for that.
Remember that no interest is charged for the first 12 months, and you can repay without penalty.

Overdrafts
If you have a very short term / immediate requirement to, say, cover payroll an overdraft may be the quickest route.  If you’re just asking for a small extension then this is likely to be approved quickly. If you’re asking for a new overdraft or a significant extension then you will have to go through the full underwriting process and provide accounts and cash flow forecasts.

Information needed
You will need to provide your 2019 annual accounts to prove you were a viable business before this all happened.  If you’ve been loss making or struggling before this happened then I’m afraid this probably isn’t going to help your business.

You will also need to provide up-to-date management accounts and a full cash flow forecast that clearly shows what your cash requirement is. It must show exactly how deep the cash hole is and when it happens. For many businesses this will be almost impossible – how can you possibly know how long and how bad things are going to be? But without a cash flow forecast, the lender may be at risk of a claim to the government under the scheme failing because they haven’t carried out the necessary checks.

You must also show that you have explored all other possible options first:

• Job protection scheme – and show when you expect the incoming grant
• All available grants
• That you have stopped all other payments you possibly can
• That you have reduced directors pay – they’re not going to fund your salary!
• And you must show clearly what your assumption are, and what risks and challenges your business will face as it comes out of this.

You will also need to prove that you can service the loan in 12 months’ time.

Other information being asked for differs by lender but these are some of the most likely things being asked for:

• A summary of the performance of your business prior to this crisis
• A summary of the actions you’ve already taken
• Details of any other funding /HP / lease agreements
• Debtor and creditor reports
• Business and personal bank statements to see how you manage your money, and personal income and expenditure
• Asset and liability statements

Timing

IF your funding application is well packaged, and has ALL of the information needed, from today it will probably take at least 4-6 weeks. I can only imagine this timeline will get longer as more applications get into the system. If they have to come back to you for missing information it will delay your application.

I would recommend using a broker who will firstly assess your funding need and make sure before they make an application that you are eligible and meet the criteria. It won’t cost you anything to find out, and then they will package everything up, already fairly sure that your loan will be accepted. And as brokers they have a direct route to the banks that could speed up getting your money.

What will the Chancellor do next?

It is already clear that the scheme is not going to get cash to struggling businesses fast enough. I expect the Chancellor will have to make some changes; when he does I'll let you know.

If you need help, in particular with preparing a cash flow forecast, you can book a no obligation call with me at https://calendly.com/noelguilford/cbils.

 

Noel Guilford