Neil Whitear discusses the Challenges for Businesses applying for CBILS
Date: 11 May, 2020
What is CBILS and who administers the scheme?
What are the sorts of things that would make my business eligible or not for CBILS Loan and, and how does that work?
In terms of eligibility, the business must have a sound proposal for borrowing the money they need to survive in these difficult times. The banks will not lend to any businesses that puts an application in - because that will flood the market with unnecessary debt. There still must be certain criteria for the borrowing party to meet.
Firstly, the business must be UK-based, and its predominant business activities must be UK-based.
In all cases, the business will be required to submit a proposal outlining the reason for the Loan and what its intended uses are. The banks need to ensure that it is not an application for a pure cash-raising exercise for a business that doesn’t really need it or has the cash reserves to survive. There could be many businesses out that there that could potentially look to take advantage of this scheme and that is what the application process is there for. Businesses will need to prove that it has been impacted adversely by the pandemic and that is the sole purpose for applying for the funds.
What about Directors / Personal Guarantees?
A guarantee is when the Director of the business put’s forward their personal assets or property as collateral should they default on the Loan.
The scheme does not require any director's guarantees on loans up to £250,000, any lend above this figure may require the directors to guarantee.
The Lenders have been instructed that the CBILS Loans are not to be secured against any Directors’ primary residents but may look to guarantee against other assets such as second properties. They will also cap it at 20% of the outstanding balance.
As part of the application, lenders will also request bank statements and cash flow forecasts which is generally part of the standard underwriting process.
What are the Challenges for Businesses applying for CBILS?
Applications are made directly to a panel of approximately 40 accredited lenders using their standard underwriting criteria. This is where things can be tricky for businesses out there looking for a cash injection.
Another challenge is the underwriting criteria is not standardized across the board. You could approach one lender and get a decline, or another who may accept the application. This makes it very difficult for a business to know which Lender to turn to.
What should businesses be considering before they apply for a CBILs loan?
Every business has different needs and requirements but a key thing to consider is, does my business need the loan, is the purpose critical or not to the survival through the Covid-19 outbreak?
It's important to remember, despite the first 12 months of interest being subsidised by the government the business is still taking on debt that needs to be repaid.
Taking on additional debt should be the last resort and the business should consider other schemes available first –such as postponing their Corporation and VAT liabilities and looking at the Furlough Scheme, along with other cost-cutting exercises.
When exploring CBILS the business should take the time to understand exactly the repayment terms and what happens after the initial 12-month period. Will they be able to afford the repayments with interest included? Do the Cashflow forecasts reflect this?
However, if the business is left with no choice, they will need to start pulling together a Proposal for the Loan with a solid case specific to the Covid-19 pandemic.
The business would also need to approach the right Lender – as discussed this can be very confusing to the Business due to the different criteria’s out there. This is where speaking to an Independent Finance Broker can help, so we can point you in the right direction.