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BANKS & GOVERNMENT SUPPORTED LOAN SCHEMES

HOW TO MANAGE MY BANK / LENDER

If you have any questions, please get in touch with our COVID-19 Task Force here

RELEVANT AS OF 1:00PM 1 JULY 2020
New Webcast

Andy Parker and Ben Rookes, Partners in our Corporate Finance team share some great insights on this webcast about Cashflow and Access to Funding.

When the £330bn of loan support under the Coronavirus Business Interruption Loan Scheme (CBILS) was announced it was seen by many as the “silver bullet” that would provide businesses with much needed extra cash during the disruption period.

However, as businesses tried to access the funds they came up against a number of practical issues, including:

  • not being able to access the scheme if they were able to secure regular commercial financing.
  • the banks processes and interpretation of the eligibility criteria not supporting fast and efficient lending decisions.
  • banks asking for personal guarantees for facilities above £250k.

In addition, the absence of any government loan programme for larger businesses (over £45m group turnover) was a concern for a large part of the UK business world given the Covid Corporate Financing Facility (CCFF)  is aimed at very large, well-capitalised businesses and is out of reach for most.

Thankfully, the government have listened to these concerns and have announced changes to CBILS and introduced the Coronavirus Large Business Interruption Loan Scheme (CLBILS) for those businesses with group turnover over £45m.

CBILS

As a reminder, CBILS is broadly for SMEs with less than £45m turnover (applied on a group basis). It  is a guarantee scheme designed to support loans or overdrafts of up to £5m and up to six years. The business remains liable for the borrowing in the first instance, but the government covers 80% of the liability if it isn’t repaid in due course. The government will pay to cover the first 12 months of interest payments and any lender-levied fees.  The funding will be provided by banks and other lending institutions. The minimum facility under the CBILS scheme has been clarified as £50,001 to avoid any risk or confusion with the new Bounce Back Loan Scheme.

When initially introduced it was only available to those businesses who didn’t meet ‘normal’ bank lending criteria. The government announced on 3 April that this requirement has been removed and that in terms of personal guarantees:

  • they cannot be requested for loans of under £250,000
  • where loans are greater than £250,000, personal guarantees will be limited to 20% of any outstanding balance after applying the proceeds from the sale of business assets.
  • Personal guarantees cannot be secured against the guarantor’s principle private residence.

These changes are welcome. Our initial experience was that businesses were struggling to articulate their requirements in ways that lenders found easy to accept, but we have since seen some positive signs in terms of number of CBILS applications being approved.

To have the best chance of a successful application, first and foremost a business should be able to demonstrate how it will recover from the Covid-19 impact and how the incremental debt can be repaid over subsequent years.

We will keep you updated on how the banks respond.

One word of caution here for SMEs is the interaction between CBILS and your R&D tax relief claims. The Government has notified CBILS as a State aid, meaning that if you apply for CBILS there is the potential that you will no longer be able to claim very generous R&D tax relief under the SME regime. Get in touch here and we can advise on the impact to your R&D claim. More details on this can be found here from our R&D partner Chris Knott. 

CLBILS

The government have acted in response to representations that there was no additional funding support for businesses with an annual turnover over £45m by introducing CLBILS.

CLBILS is a guarantee scheme designed to support loans of up to £200m at commercial rates of interest with the benefit of a government guarantee of 80% of the loan.

From the 26 May larger businesses are now able to borrow up to the lower of 25% of turnover, or £200 million. Those borrowing more than £50 million will be subject to restrictions including a ban on dividend payments and cash bonuses, except where they were previously agreed.

Finance terms are from three months to three years depending on the type of finance, but unlike CBILS the government will not pay the associated fees or interest for the first 12 months. There are no personal guarantees required for facilities under £250k

Future Fund

The Chancellor recently announced an initial commitment of £250m to establish a new Future Fund to support the UK’s innovative businesses adversely affected by Covid-19. These businesses have typically been unable to access other government support programmes, such as CBILS, because they are either pre-revenue or pre-profit and typically rely on equity investment. Applications for the Future Fund commenced on 20 May and are expected to run until the end of September at the earliest.

Due to the popularity of the Fund, more money has been made available, with around £320m having now been invested.

The Future Fund provides government convertible business loans ranging from £125k to £5m, subject to at least equal match funding from private investors (from UK or overseas). Companies applying must be unlisted and have raised a minimum of £250k from private backers within the last 5 years. The Future Fund is managed by the British Business Bank.

The government have published the terms here – These need careful consideration and more widely you will need to consider if convertible loans are the right option for your business overall. As it stands the scheme is not considered to be available for match funding on equity investments – it is designed to match only convertible loans provided private investors. Where terms agreed with private investors are higher than the published minimum acceptable terms, then the Future Fund will only loan on the basis of those higher terms.

There are minimum terms which the Future Fund have published here. Headlines include a minimum 20% conversion discount, a maturity term of 36 months, and a minimum 8% non-compounding interest rate.  Make sure you understand the conversion redemption – if you do not raise a qualifying investment round in during the term, the loan is repayment on maturity with a 100% premium. Yes, you pay back twice the amount of the loan. Watch out for the transfer rights as well – the government have stipulated in the terms of the loan, that they can transfer the loan to a third party and the company will inherit that party as a lender or shareholder with influential rights.

A final point of note is the intersection of the convertible loans with SEIS and EIS. The British Business Bank noted that the Government confirmed that previous SEIS/EIS qualifying investments will not be affected where the convertible loan converts into shares. Where the convertible loan note redeems, the government intends to make changes to the rules to clarify that previous SEIS/EIS qualifying investments are not affected. The structure of the convertible loans does not meet existing rules for SEIS/EIS qualification.

Full FAQs are available here .

If you require any help in determining whether the Future Fund is right for you then speak to Steve Leith who heads up our High Growth team. They have direct connections into individuals who were involved in the legal structure of the government loan documentation.

SUSTAINABLE INNOVATION FUND

This is a separate fund announced by the government which is aimed at businesses carrying out R&D. The £200m fund was launched on 27 June and will be open to companies across all parts of the UK who need urgent financial support to keep their cutting-edge projects and ideas alive.

In particular, the target for this funding is projects with sustainability at their heart. Examples given are projects with a focus on:

  • Decarbonisation;
  • Climate change;
  • Geographic or regionally-targeted innovation;
  • Innovation that is aimed at commercial or residential users;
  • Innovations that work across more than one sector;
  • Follow-on international opportunities that help the UK lead the world.

Each organisation working on eligible projects, alone or in a collaboration, can claim a maximum of £175,000.

Eligibility criteria for the funding are:

  • Can be claimed by UK registered businesses (not sole traders) of any size but involve at least one SME
  • Total eligible project costs between £100,000 and £500,000
  • Projects must be carried out in the UK, be ready to start by 1 October 2020 and can last between 3 and 9 months
  • The claimant organisation was not in difficulty on 31 December 2019 but faced difficulties later as a result of coronavirus

You can read further information and apply for the grant on Innovate UK’s website, here.

Bounce Back Loan Scheme

Small businesses struggling amid the covid-19 pandemic have received some welcome news with the government announcing a new fast-track micro loan scheme.

The Bounce Back Loan Scheme (“BBLS”) will help small and medium businesses borrow between £2k and £50k, with the government guaranteeing 100% of the advance. With a simple online application process (seven questions) and simplified eligibility criteria it is hoped that many applicants will receive funds in a matter of days if not 24 hours post application.

Bounce Back loans will be repayment free (interest and capital) for the first 12 months. Loan terms will be up to six years and the government will work with lenders to agree a low flat rate of interest of 2.5% for the remaining term of the loan.

If you have been successful in a loan application of up to £50k through CBILS, you can arrange for this to be transferred through your lender to Bounce Back Loan Scheme until 4 November 2020.

The scheme is open from the 4 May.

Our experience  
  • Banks are scrambling to resource and establish processes to manage the deluge of approaches – most are focusing on supporting existing customers and indicating that they will not have much appetite for lending to “new-to bank” businesses.
  • Having said that, we are also aware of some non-traditional lenders working quickly to become part of the CBILS accredited lenders programme so that they can make further capital available.
  • Banks are viewing loan applications in the way they would for any other loan or overdraft – business viability and debt service will remain at the core of their assessment.
  • You will need to demonstrate business viability pre-Covid – and a plan to show how the business will recover and over what time period, post Covid.
  • The essence of any lender assessment has to be “once this is all over” can the business repay the resultant debt over a reasonable period of time (say 3-5 years maximum).
AT A GLANCE: What financial help might your business get?

The Bounce Back Loan launched on the 4 May, so we thought we’d use the opportunity to summarise where we’ve got to with the key financial measures announced for businesses of different sizes

Firm Size
Turnover < £45m Turnover > £45m Investment Grade
Bounce Back Loans (Up to £50k) X X X
Coronavirus Business Interruption Loan Scheme (CBILS) X
Coronavirus Large Business Interruption Loan Scheme (CLBILS) X X
Covid Corporate Financing Facility (CCFF) X
Job Retention Scheme X X X
Business Grants (dependent on rateable value of the property) X X X
VAT Deferrals and Time to Pay X X X
Statutory Sick Pay Rebate Scheme (employers with less than 250 employees as at 28 February 2020) X X X
Future Fund (only if VC funded) X X
 What should you be doing?

We think the following immediate actions are the best way to consider and approach your bank / lender;

  • Realistically assess your cash requirements for the next 3 and 6 months at least; banks will expect you to have taken account of all the available government support options, such as VAT deferral, HMRC Time to Pay, Job Retention Scheme, etc. We also think your forecast should extend to show how the business recovers post-Covid and into the next 3 years (to be able to show how existing and new debt can be repaid).
  • Evaluate your cash need over this period, and consider a number of scenarios – worst, mid, best and a variety of recovery time periods.
  • How quickly can the business repay the incremental debt – therefore what is the right debt structure and repayment period to request and accept from lenders?
  • Are your shareholders and management comfortable with the additional debt – are there any other options, i.e. shareholder injection, creditors, etc. Be mindful of the impact on medium term shareholder value
  • Also be aware of directors’ personal responsibilities around treating creditors and shareholders fairly, and the risks of trading whilst insolvent – does the incremental debt change these views?
  • Consider carefully what your ask of the lender is – you may only get one shot. Should this be capital repayment deferral, covenant testing deferral, or additional money (currently all banks are resisting deferring interest payments as this causes them regulatory capital problems – but watch this space).

If you are looking for help with funding, we have a number of specialists in the team who worked through the 2008-10 crisis. Please get in touch with our CF Partner Ben Rookes.

Detailed information on the CBILS scheme and accredited lenders can be found here.

Details in relation to the CLBILS scheme and accredited lenders can be found here.

Details in relation to the Bounce Bank Loan Scheme can be found here.

Our CFO, James Parnell, shared his own views on some of the issues involved in accessing funding when it was first announced. It’s well worth a scan – and you can read it here.

If you have any questions, please get in touch with our COVID-19 Task Force here

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