Updated 8th April 2020

For many business owners who’d already seen an immediate reduction or cessation of their trading, the announcement of the Coronavirus Business interruption loan Scheme (CBILS) was like a bright ray of sunshine on some very dark times. 

Many of you will then have rushed to call your business managers to get this in place to find that the bankers and government were not singing the same tune. Instead you were being told about other types of lending with personal guarantees. I’m sure many of you stepped away from that call thinking your mind that had been in overdrive for days was playing tricks on you. 

The banking world, who have always had a lot of pressure on them to be responsible lenders, had concerns over the lending announced by government and also had a lot of internal changes to make to be ready for lending thrust upon them with little notice. 

Two weeks later the bankers have had time to catch up on what the government need in place and are now in a much better place to discuss lending with their clients BUT you need to have done your business homework. 

I’ve outlined below the criteria for these loans and all your finance options because taking finance is a big commitment in any circumstances. It needs to be well planned because it may affect your ability to borrow during the term of lending so its important you ask for the right amount even if knowing that in the current times is like chasing the end of a rainbow.

Eligibility 

The key issues that will help establish whether you are eligible are:

  • Have you been trading for more than 1 year?
  • Were you profitable (before the current crisis)?
    (only exception is first year loss but up to date management accounts show profit)
  • Over 50% of your turnover has to be from your main trade (investments will not be assessed)
  • Accounting records must be up to date with bank accounts reconciled to 31st March
  • Be able to demonstrate you have taken up all other possible reliefs? VAT deferrals, time to pay, job retention scheme etc.
  • Be able to demonstrate you have negotiated with suppliers, deferred rent and implemented other cost cutting measures?
  • Completed a comparison of pre and pot COVID 19 trading conditions
  • Your business has to have been ‘viable’ at December 19
  • Your business has been specifically affected by COVID 19

Loan types and rates

The aspects to any CBILs loan are:

  • Term loans and asset finance up to 6 years
  • Invoice finance and overdrafts up to 3 years
  • Capital repayment holidays of up to 12 months
  • First year’s interest and arrangement fees covered by the government
  • No charge for the 80% government guarantee
  • There are no personal guarantees for loans of less than £250k and if over this amount the personal guarantee is only for 20% of the loan

How much can your business borrow?

The maximum loan is 2 times the annual wage bill or 25% of turnover if the business has been open for 2 years or more. It is not clear whether it’s the higher or the lower of the two and this may be down to your bank’s discretion.

If your business has not been trading for two years, then the maximum amount is 1 times the annual wage bill.

What interest rate will you pay?

Typical rates will be between 3.5% to 5%

Overview of progress so far 

  • There are currently 40 accredited lenders offering CBILs
  • There have been 130,000 applications and enquiries
  • Out of this figure, only 983 have been approved with £90m bound
  • Lenders are struggling with customer demand hence the announcement that they will not take on new customers as their systems are not up to it
  • Having said that, we have been advised that some banks will take on new customers for CBILs but only if you have applied for it and been rejected by your own bank. You are likely to be at the back of the queue though!
  • From 3rd April onwards, banks can no longer attempt to offer you another type of loan if you are eligible for a CBIL

What information do you need to complete before you approach your bank?

  • Up to date annual accounts submitted to Companies House
  • Management Accounts up to 31st March 2020
  • 6,9 and 12-month cashflow demonstrating repaying delayed VAT, PAYE etc

Other finance options

1. VAT deferral

Any lender will want to see you have used the finance already being allowed by HMRC to help fund the gap

2. Time to pay arrangements with HMRC

Using time to pay arrangements with HMRC for PAYE/NIC is also another good way to help fund the business until some of the grants or furlough funds are paid out. Lenders will expect that you have a short-term plan to cover the next month or so.

3. Payment holidays from finance on vehicles

With many company vehicles off the road, have you considered declaring these as SORN and delaying the finance payments?

4. Business overdraft

Speak to your bank manager about the business overdraft facility that may already be sitting there as pre-approved. Whilst this isn’t a good long-term solution it may afford you the time to complete your 6, 9 and 12-month cashflow forecasts which will be necessary for any longer-term funding needs.

5. Sale and lease back of assets

If you have a large amount of assets, you may find it easier to organise a sale and leaseback arrangement with a financer. This means you are limiting your exposure to your asset class without having to make any personal commitments.

6. Re-mortgage or drawn down on equity from personal mortgage

Whilst this might seem like a controversial option, personal mortgage lending is still at very low rates. For those of you with good equity in your properties it maybe a quicker and easier way to inject funds into your business. You can also repay yourself with interest at a later date which attracts less tax than dividends (20/40/45% compared to 26.5/45.32/49.86%).

7. Invoice finance or invoice discounting

This is where you are advanced funds based on your debtor book with the balance less fees being paid to you at the point your customer settles their debt. This type of lending can also have debtor protection insurance built into the fees which means you are more protected against bad debts. This type of lending works well for businesses dealing with larger type customers who may take longer than your normal payment terms to pay or if you are a good profit margin business. It doesn’t tend to work well for low margin businesses due to the costs of finance and any type of finance would need to be carefully considered.

8. Pension drawdown

If you are over 55, you should be able to draw a tax-free lump sum from your pension and beyond that draw funds taxed at your normal rates. You should ensure professional advice from an Independent Financial Adviser though.

When considering finance options it is important to ensure you are getting good professional advice and an objective analysis of your application before submission. The high number of applications being received means that you may only get one chance to get this right.

Contact me today!

Emma White

FCA

Partner

01474 853856

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