The Coronavirus Business Interruption Loan Scheme was introduced in Spring 2020 by Chancellor Rishi Sunak. With the pandemic in its infancy, and a full lockdown just announced, the advent of an interest-free loan opportunity for UK businesses was necessary.
The purpose of this scheme was to provide financial support to UK SME’s in the form of loans, with generous terms offered, the most pertinent of which being:
- No Personal Guarantees. The Government would be guaranteeing these loans on behalf of the borrowing business
- All fees + first 12 months interest paid for by the Government (known as a Business interruption Payment, or BIP)
- Up to (but not exclusively) 25% of turnover available to borrow under the scheme.
- The businesses are to be underwritten on their 2019 accounts.
Sunak’s aim was to provide as much liquidity as possible to the British SME debt market so that those SMEs could survive the lockdown and come out the other side with a viable business. The risk was taken off lenders with the guarantee and the fee payments: and the immediate debt burden was taken off the borrowers with the 12 month payment holiday.
With the country sliding in and out of lockdowns for the next 15 months, many of those businesses found themselves with an incredible debt burden (potentially more than 25% of the companies’ pre-covid turnover), and no sign of being able to service it. The question, therefore, arises, how many of these businesses exist and how many of those who took CBILS will be unable to repay it?
For starters, £23.28bn in CBILS was lent by the approved lenders. There were 2,384 business insolvencies in the first quarter of 2021, which is the lowest quarterly number on record, and almost 25% lower than the first quarter of 2020. In the calendar year of 2020, there were fewer company insolvencies than ever, another record. Clearly, there is or was something propping up companies’ balance sheets to a greater extent than normal, despite many saying we are currently in the deepest recession since the 1920s.
Obviously, the extent to which companies will struggle to repay debts depends on a few things; the economy, size of the debt, type of debt, terms of the debt, inflation, tax to name just a few. A few qualifiers are needed.
If there is significant inflation, this will benefit those with lots of debt. This is because the number of pounds owed will not change, but what that pound will buy you when inflated will be much less. Many analysts and commentators do think this will be the case, but for the purposes of this argument, let us not make macro-economic predictions. Let us look at the CBILS facilities were actually structured.
Borrowers do not have to start servicing CBILS until the 12th month. Companies that took CBILS at the beginning of the pandemic will, at the time of writing, have been servicing that debt for at 3 months now. We are still in a lockdown and many businesses are not back to pre-covid levels, especially when one looks at hospitality.
25% of turnover is a very large amount of capital for a business to be servicing over a maximum of 4 years. A £250,000 Funding Circle CBILS (Risk band B) will have monthly repayments of more than £6,300. It will depend on many things but one of the main facets of the loans has been made redundant and is being made more so every day we are in lockdown.
It is likely that these companies will either:
- Fold and not repay their CBILS, the cost of which will then be absorbed by the Government and, (depending on how these guarantees pan out) the lender.
- Be obliged to take on more debt.
The Recovery Loan scheme was announced as a replacement for both CBILS and Bounce Back Loans. There is still a Government guarantee on these facilities but none of the other terms.
It will remain to be seen whether these companies can access the RLS, or whether it will be offered as widely as CBILS. One lender that Funding Bay has on its panel has indicated that it will not be lending to businesses that do not demonstrate affordability. Given that there has been a retraction in the number of insolvencies in the last 18 months, it is likely that these businesses that have had the hammer blow postponed by CBILS will ultimately fail. The real question is who will ultimately lose out; my guess is that, as it always is, it’ll be the taxpayer.
If you would like to find out more about the Recovery Loan Scheme, getting in contact with a member of our team at Funding Bay and we will be able to set you up with a consultation. Contact below.
