A new acronym - CBILS

When the Coronavirus Business Interruption Loan Scheme, now commonly known as CBILS, was first announced by Rishi Sunak in March 2020, the full economic impact of the COVID-19 pandemic was not yet known.

Many would argue that we still have limited clarity over 6 months on. It is clear however, that the impact is far from a short sharp shock and any hopes of a rapid return to “normal” have been dashed by recent infection and hospitalisation figures. The consensus amongst economists now targets a return to 2019 levels of activity no sooner than 2023. It is with this backdrop that we are talking to clients about assessing their financing needs for the tricky times that lie ahead.

A business lifeline

CBILS has provided a lifeline for many businesses across the UK. Without it and the other measures introduced by the government, corporate failures would have been significantly higher. But all this support must end at some point and the government is indicating strongly that this point is not all that far away.

In specific relation to the CBILS scheme, when it was announced in March the scheme was to stay open until 30th September. It was later clarified that this meant that applications would close on 30th September with lenders given until 30th November to process the loans. Towards the end of September, a much-expected extension was announced for applications to 30th November with all loans to be processed by 31st December.

CBILS extensions

Do we think that there will be a further extension in 2021? Our view is that this is unlikely. The government is starting to think about balancing the books and exposure to the scheme albeit only by ‘off balance sheet’ guarantee will need to be limited. As such, there is a window for all businesses to sit back and consider if they have sufficient resources on their balance sheet to weather two to three years of turbulent recovery. Consideration must also be given to the investment and adaptation that might be required to bring pre-2020 business models in line with the new world order.

Leveraging CBILS

So if you decide a bit more cash at hand would be a wise defensive tactic - let’s be honest it’s not a bad idea as a business never failed because it had too much cash - then how do you go about it?

For those that rushed out in the early days of the CBILS campaign and borrowed a “modest” amount from a high street bank without too much trouble, you may now think that an extension of that facility will be an easy ask. Unfortunately, our experience is that high street banks are very worried about their exposure to CBILS loans and are not open for new, or extended business.

Lending appetite

The appetite for lending under CBILS now sits with the alternative market and it is here that borrowers are likely to have more success. When CBILS was first announced, 40 lenders that were part of the Enterprise Finance Guarantee (EFG) scheme were told that they were now CBILS lenders. They were put under massive political pressure to get money out of the door. This of course included all the major high street banks. These lenders were in effect force fed CBILS credit by the government and inevitably have been left in a very uncomfortable position.

An alternative perspective

The alternative market had a very different perspective on events, they saw CBILS as an opportunity and actively applied to the British Business Bank to become CBILS accredited. This cohort of new applicants now numbers in excess of 70 new lenders all of whom have invested significant time and money to lend under the scheme. Delays in some accreditations means that numerous lenders have aggressive lending targets to hit in a contracted time frame to balance the books. Herein lies the opportunity for SMEs assessing their needs for the coming recession.

So, let me dispel a couple of myths. Firstly, you can have multiple CBILS loans if your total borrowing under CBILS does not exceed £5m. If you already have a CBILS loan, this means you can reassess your needs. Secondly, it is perfectly acceptable to borrow extra to meet your forecast liquidity needs over the next 12 to 18 months. This may be required if the situation has dramatically changed from your initial assessment in March. Finally, you do not have to pretend that everything is going to be okay when presenting your case to a lender. Over optimism is not going to help.

Loan security

Given complexities arising from loan security, you should also assume that a loan from the alternative market to supplement the high street loan that you already have is in no way a realistic possibility. We are looking at a full refinance of existing facilities, which is entirely possible.

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"Our advice is to consider if you are appropriately set for the tough years ahead."

Borrowers may get hung up on the fact that the high street bank CBILS loans were extended at rates materially lower than the alternative market may offer. There will likely be resistance to replacing this “cheap money”. That said the high street banks put out CBILS money at rates that made us raise eyebrows, we have evidence of one high street offering CBILS at 1.5% above base. That’s free money when inflation adjusted.

Borrowers should look at the alternative rates of 7-10% per annum on their own merit given the leverage these lenders are willing to accept. Leverage of 2.5x EBITDA is perfectly possible. These rates also need to be adjusted to account for the fact that the first year of interest is paid by the government under the Business Interruption Payment scheme. What is the value of peace of mind and resources to react to the market around you?

In summary, and without getting overly technical, our advice to clients at this juncture is to consider if you are appropriately set for the tough years ahead. If not, you may regret not seizing the CBILS opportunity whilst it exists.

We work with growing UK SMEs and small-cap PLCs that have funding needs in excess of £2m and regularly approaching £100m. Our clients’ needs will typically be for sophisticated finance products such as cash flow based lending or private equity investments. Our value lies in helping clients access funding that relies on confidence in future trading and cash flows. For a confidential, independent, no obligation discussion on the funding options available click the 'Let's chat' button.