The COVID-19 pandemic has resulted in wide scale disruption for businesses, including significant challenges on their ability to manage cash flow and to service their financing needs through the crisis and beyond. The Government has rightly focussed on a rescue package of measures to ensure businesses survive the uncertain months ahead.
We have examined below some potential sources of debt financing for businesses, including the recently announced Government Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Bounce Back Loans Scheme (BBLS).
We explore financing options for start-up businesses, including the Government’s Future Fund, in a separate article ‘COVID-19: Challenges and opportunities for Tech Startups’ which you can read here.
The first point of contact for most businesses when looking to obtain further debt finance will be their existing lender. It might be that the lender is able to provide further finance through the CBILS, CLBILS or BBLS (as appropriate), each examined in more detailed below, under an existing facility (to the extent that facility is not fully drawn and is still within the availability period), by way of a new facility or by extending a current facility.
Whilst drawing under an existing facility may be relatively quick and subject only to the borrower satisfying any conditions precedent for making further drawings, applications to extend or create a new facility are usually much longer processes requiring credit approval and involve a much more extensive list of conditions precedent.
Many businesses may well find traditional bank finance may prove too slow to meet businesses’ urgent financing needs.
Alternative sources of finance
Accordingly some businesses may look towards other funding sources to provide more immediate finance including their shareholders, who may be able to move more quickly, or more agile lenders such as family offices and private equity.
Any negotiations concerning finance other than debt (such as equity investment) may well run into problems around valuation given the current economic conditions.
Government CBILS or CLBILS Finance
The Government has also introduced CBILS to help provide financing to SMEs, and CLBILS to help medium and large businesses, experiencing financial difficulties as a result of the COVID-19 outbreak.
Whilst the schemes are being coordinated through the Government-owned British Business Bank, the loans are made by the British Business Bank’s ‘accredited lenders’ which include high street banks, challenger banks, asset-based lenders and specialist local lenders.
Under CBILS, qualifying UK businesses may borrow up to £5 million from an accredited lender over a term of up to six years and, under CLBILS, qualifying UK businesses may borrow up to £50 million from an accredited lender over a term of up to three years. A key part of each scheme is the Government-backed partial guarantee which means the Government will guarantee 80% of the outstanding facility.
The schemes have been established to support businesses which would be viable if not for the COVID-19 pandemic.
CBILS was the first scheme to be announced by the Government, open for six months from Monday 23 March 2020 and CLBILS came into force on 20 April 2020.
When CBILS initially came into existence, it came under fire for the personal guarantees that the banks were asking to be provided by business owners and directors prior to lending under the scheme. As a result, the ‘rules’ of both schemes now restrict when lenders may request personal guarantees from business owners and directors.
Currently, personal guarantees cannot be required for facilities under £250,000, they cannot cover a primary personal residence of the business owner or director, and recoveries under the personal guarantees are capped at 20% of the outstanding balance. As with any form of finance, business owners and directors should still carefully consider the terms of any loan made available under CBILS or CLBILS and, if asked to give a personal guarantee to get independent legal advice.
Business owners and directors should also be mindful that, while the facilities made available under the CBILS or CLBILS are partially guaranteed by the Government, this guarantee is to give the lenders confidence to lend to businesses. Fundamentally, it remains that the borrower is 100% liable for the debt and repayments when they become due.
On 27 April 2020, following criticism about the availability and ease of accessing finance under the CBILS, the Chancellor announced the BBLS which looks to provide eligible small and medium sized businesses with fast tracked finance, between £2,000 to £50,000 borrowed for up to six years, with the aim of allowing those businesses to access the cash within days of an application.
The key feature of financing under the BBLS is the 100% Government guarantee which looks to provide comfort to the banks to allow them to finance to these smaller companies.
However, as with the CBILS and CLBILS, the borrower will remain liable for 100% of the debt and repayments when they become due. The scheme is due to become ‘live’ on Monday 4 May 2020.
Directors should be careful to review any existing finance documents, constitutional documents or other shareholder arrangements to determine what, if any, restrictions there may be on entering into new finance facilities or accessing any other Government schemes, and what waivers and consents might be required before taking such actions.
If businesses are looking to further debt funding sources, directors will also need to be careful of the wrongful trading provisions under the Insolvency Act 1986 which could result in personal liability for them if they take on more debt at a time where there is no reasonable prospect of such debt being repaid.
The Government has indicated that it is looking to reform insolvency laws including a three month temporary suspension of wrongful trading laws from 1 March 2020 to afford leniency to directors at this time but, at the time of writing, it has not detailed these proposals.
Prior to entering into any financing arrangements, it will therefore be important for directors to carefully consider the ability of the business to continue to trade after the lockdown and other restrictions on our working lives and, if necessary, obtain input from an insolvency practitioner or legal adviser.
This information is part of a series of Harbottle & Lewis Business Law Updates, focusing on legal and business operational issues arising in the current COVID-19 crisis.
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