Staff Writer AccountingWEB
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Banks neuter coronavirus business loan scheme

Following Chancellor Rishi Sunak’s announcement of the £330bn coronavirus business interrupted loan scheme (CBILS), businesses and their advisers have been confused about what the loans will entail, and who will be entitled. Maddy Christopher goes in search of the elusive cash on offer.

3rd Apr 2020
Staff Writer AccountingWEB
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UPDATE, 3 April - In response to the criticisms that were being raised about the loan guarantee scheme announced in this year’s Budget, the government released new guidance to banks this morning relaxing some of the more contentious conditions. As reformatted, CBILS 2.0 will ease the requirements for smaller businesses seeking lending facilities of up to £5m to help them through cashflow disruptions caused by the coronavirus. Further details of the scheme will be announced later this month, the Treasury said.

The qualification criteria have been relaxed in the following ways:

  • Borrowers do not have to explore other commercial sources of finance first before seeking a business interruption loan
  • Personal guarantees waived for loans under £250,000
  • Businesses turning over up to £500m will be able to ask for loans of up to £25m
  • CBILS will be offered at commercial rates of interest.

* * *

[Original article, published 27 March 2020] According to British Business Bank, the loans will be provided through one of the 40 CBILS accredited lenders only. Already, however, the scheme is coming under fire from accountants and banking critics who say it is just perpetuating the banking sector’s exploitative tendencies when dealing with small business. This article examines the underlying criteria and draws on examples of how the scheme is being applied to ask whether the loans are getting through to the businesses that need them.

Who is eligible? 

According to the British Business Bank eligibility checklist, to qualify for CBILS businesses must:

  • Be a UK-based business beneath the £45m turnover cap
  • Have a viable borrowing proposal outside the current pandemic
  • Prove to the lender the loan will enable it to trade out of any short-term to medium-term difficulty.

Who is exempt?

  • Banks and building societies
  • Insurers and reinsurers (but not insurance brokers)
  • Public-sector organisations, including state-funded primary and secondary schools
  • Employer, professional, religious or political membership organisations
  • Trade unions

The ICAEW and British Business Bank provide regularly updated advice regarding the scheme to provide help to businesses considering the scheme. 

Nature of the guarantees

The loans are intended to cover term loans, overdrafts, invoice finance and asset finance facilities and come with an 80% government-backed guarantee to boost loan approvals for struggling businesses.

This essentially means the government will cover 80% of any losses, leaving lenders in danger of covering the remaining 20%. What Chancellor Sunak’s speech did not explain was that this “generous guarantee” would not prohibit lenders from demanding guarantees from borrowers before agreeing loans.

Keen to avoid exposure to this potential shortfall, lenders may have been asking would-be small business borrowers to prove additional guarantees. Should the borrower fail to repay the loan, the lender would pocket the 80% government guarantee and then go after the borrower for their personal guarantee to make good the missing amount. 

Application of CBILS in context

Lloyds Bank explains in its application criteria that businesses will be able to borrow up to £250,000 on an unsecured basis under the CBIL scheme.  However, it emphasises, “The customer will remain liable for 100% of the debt, including any accumulated interest even if the Government guarantee has paid out.”

Lloyds offers the following example: if a business borrowing £100,000 over six years under CBILS fails with £80,000 still outstanding, the bank will pursue the customer for the outstanding debt. After all options are explored and £50,000 is reclaimed by the bank from the customer, the government will pay 80% of the outstanding £30,000 under CBILS. 

The bank then “continues to look for the outstanding repayment of £30,000 from the customer.” If the customer is able to pay £20,000, the bank refunds 80% (£16,000) to the government [but] the customer remains liable for the £10,000 still outstanding.”

As AccountingWEB user sb3736 pointed out, “If the customer [is] forever liable, whatever happens, then what is the point of having a government guarantee in the first place?”

Rather than supporting struggling businesses, the loan guarantee scheme looks like it is turning into a cosy little safety blanket for big banks.

Behaving like sharks

As the British Business Bank confirmed, ultimately “the lender has the authority to decide whether to offer you finance. If it can do so on normal commercial terms without having to make use of the scheme, it will.”  This clearly allows lenders to interpret the terms of this scheme at will, or reject it altogether.

However, British Business Bank also stipulated, “The Big Four banks have agreed not [to] take personal guarantees as security for lending below £250,000. If one lender turns you down, you can still approach other lenders within the scheme.”

Unfortunately, reports from the field indicate that some of these banks are still asking for personal guarantees.

Barclays position on CBILS 

Accountants including Carl London have had issues with the scheme. “Barclays offered a loan to my client's business but asked for 100% personal guarantees! What is the point in them being 80% government backed if the banks ask for 100% PGs?!”

AccountingWEB contacted Barclays about this complaint, and received the following response: “We are not asking for 100% guarantees on CBILS. [To] get funds out to businesses as quickly as possible, we have removed the need for a personal guarantee if the loan amount is less than £250,000.” 

Barclays, along with  RBS, Lloyds Banking Group, Virgin Money and HSBC all pledged to not request personal guarantees on CBILS loans up to £250,000, yet the evidence is stacking up of ambiguous interpretations of the scheme criteria. The BBC reported: “Barclays has told customers they will be required to sign personal guarantees to access the government-supported emergency finance.”

Small Businesses also cited cases where Barclays “had been asking small businesses for personal CBILS guarantees.”

According to Barclays, it is now basing its lending decisions on whether the applicant was able to afford a loan in 2019, rather than using future earning projections to assess whether they will be able to pay back the loan. 

Barclays has also apologised for quoting interest rates of up to 12% for CBILS when BoE rates have been at record lows and told Small Businesses it would be “reviewing applications to ‘ensure no errors are made’ and said no successful applicant would have to pay more than 5% for a CBIL.”

AccountingWEB member Meadowsaw227 complained that clients “are finding it virtually impossible to get through to Barclays - 4 hour wait and then being cut off.”

Adding to the weeks or months experts have said the loans could take, it appears that access to CBILS is a moot point for those unable to even make inquiries.

NatWest avoids CBILS 

Perhaps the banks’ behaviour on personal guarantees stems from the insistence that businesses seeking support under the scheme explore all other options for finance first?

AccountingWEB user Cheshire shared this response from NatWest regarding the scheme: “In situations where the customer has reached their level of unsecured debt that the bank is comfortable with, CBILS could be a viable option. Standard lending criteria must be exhausted first before CBILS can be considered. The purpose of the scheme is not to put cheap money out there, its to support businesses that otherwise wouldn't be able to obtain bank funding.”

NatWest has been asked to comment on this, but has not yet responded.

Government and Bank of England respond

The Chancellor and the Bank of England have since written to lenders to instruct them that small businesses should not be penalised if loan repayments are missed or overdraft limits are exceeded. This should preserve their credit ratings during this crisis.

Business secretary and qualified accountant Alok Sharma amplified the message at the Downing Street coronavirus press conference on Wednesday evening. “It would be completely unacceptable if any banks were unfairly refusing funds to good businesses in financial difficulty. Just as the taxpayer stepped in to help the banks in 2008, we will do everything we can to help the banks repay that favour and support the businesses and people of the UK in their time of need,” he told the nation.

But as AccountingWEB contributor Richard Murphy pointed out in his blog, the government needs to back these loans with 100% guarantees, otherwise banks have no incentive to put themselves at risk. 

Until that happens, the coronavirus business interruption loan scheme is just a grand £330bn gesture rather than a practical way to inject much-needed emergency cash into struggling firms.

Replies (16)

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By doorsteps
02nd Apr 2020 10:01

I have evidence of banks offering interest free loans to "gold chip"clients who don't ask for or even need them. They are being offered without guarantees. It smacks of banks using up their loan pot allowance given to them by the government on zero risk lending.

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By wilcoskip
02nd Apr 2020 10:02

Unless the government find a way to bypass the banks and lend directly to businesses, this scheme just isn't going to work.
We know what the banks are like at the best of times, and we're a long way from those at the moment.

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By rememberscarborough
02nd Apr 2020 10:11

Suspect this is down to revenge pure and simple.

Since the credit crunch ALL politicians have taken the opportunity to have a go at them and now that they need them the banks are applying the "rules" that the politicians brought in.

Currently the banks are enforcing the golden rule that to prove you're eligible for a loan you first have to prove you don't need it. Unless the government changes the rules banks won't be lending money any time soon despite their protestations that they want to "help" their customers....

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By Edward Beale
02nd Apr 2020 10:16

"Richard Murphy pointed out in his blog, the government needs to back these loans with 100% guarantees, otherwise banks have no incentive to put themselves at risk."

If there is 100% government guarantee the banks are not at risk!

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By DMBAcc
02nd Apr 2020 10:18

I get so angry it makes my blood boil. I would like to see who advised the Civil Servants in creating this smoke and mirrors scheme. A few Bank officials perhaps? It makes the Gov't look good without actually doing ANYTHING. Same old same old politics. One rule if you are in the club and another if you are not. Banks took tax payers money in 2008 and paid themselves hefty bonuses and they will do the same again - mark my words. The whole thing stinks. It seems to me that the Civil Service wants a large part of the small business sector to fail in order to simplify the complications they will face when they try to bring MTD in for everyone. So much for Tory's supporting small businesses. Since 2010 they have sought ways to screw us and they still do e.g. Employees get their money now and SMEs have to wait till June when they will already be bankrupt.

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By NLB
02nd Apr 2020 10:32

As always you need to get into the detail, this article doesn’t very much and focusses on the PG issue which is now stale. Lloyd’s may well have removed PG but still want a first ranking debenture, this becomes an issue if lending is already in place with a 1Deb or might be in future. They also have no idea how to assess a business as they have commented on the requested worst case forecast prepared at their request “doesn’t look like you will make much money this year, we can’t lend”. Much much deeper issues than PG which is just being used as an understandable headline for people who don’t know how all this stuff works.

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By plega
02nd Apr 2020 10:52

Richard Murphy is wrong that the banks have no incentive to play under an 80% guarantee.

Banks lend by matching risks with margins. A loan offered at 5% over cost of funds is normally considered to have a margin of 5%. But if the government guarantees 80%, the margin on the customer risk is now 25%. This looks pretty good on any loan book. I would expect the banks to load up their loan books with as much of this as they can get.

However, it will all end in tears.

Many years ago (2003) I took on an SFLGS loan from Bank of Scotland. It 75% government guaranteed. You only qualified for the scheme if you were not able to provide a personal guarantee; and as this was money for expansion I was not prepared to put my house on the line.

Now, six months later a big contract failed to close and I went to the bank for an overdraft to tide me over. My (long-standing) bank manager told me that my account had been moved to Edinburgh (head office) along with all the other SFLGS account holders. Why ? Because the bank was making such good margins on this scheme (see above) that they needed centralised control to make sure foolish branch managers didn't put the scheme in jeopardy. So I told Edinburgh it was an emergency and, yes, I was now prepared to put up my house as security. Edinburgh turned me down on the grounds that if I provided security for my overdraft it would go against the statement in my original SFLGS application that security was not available; and that might make it look as if there was an irregularity in one of their SFLGS accounts.

Readers of this site will know perfectly well that when offered a choice between helping a good customer and preserving a gold-plated copper-bottomed government-risk income stream any clearing bank will go for the latter like a shot.

In my view the SFLGS scheme was unnecessarily generous to the lenders with the result that they were happy to bankrupt customers in order to preserve the scheme. Sadly, the present scheme looks to be every bit as bad.

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By Meltonmark
02nd Apr 2020 11:24

Another example of privatizing the profits and socializing the losses...?

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Replying to Meltonmark:
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By plega
02nd Apr 2020 11:35

To be fair, any scheme that says "government guarantee" on the tin is going to deliver that.

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By DMBAcc
02nd Apr 2020 11:41

To summarise all comments to date. This scheme is about enriching banks not saving businesses who ultimately still pay the large majority of tax in this country. It's still a case of "keep the Plebs in their place"

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Replying to DMBAcc:
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By plega
02nd Apr 2020 12:58

You are suggesting a malevolence for which there is no real evidence. The policy appears to be "give the banks some sure-fire profits so that they don't have to call in their loans". Like it or not, that is for the good of all of us at this juncture.

My concern is not the bung to the banks, it's the re-creation of a guarantee scheme which will damage small companies.

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Replying to plega:
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By DMBAcc
02nd Apr 2020 18:31

Hi Plega, perhaps I may be OTT but sadly I have seen this for 20 years. This is politicians double talk. The average man in the street thought businesses were going to get tax-payer backed loans not commercial loans from Banks (profiteering). This was portrayed as helping the small businesses but here in Cornwall no one can get a loan unless they sign their soul away in blood, if at all. As I predict many small but significant businesses in Cornwall will never recover thus accentuating the poverty already here. We have 6 out of 6 MPs who are Tories yet I hear NOTHING from them as a group pressurising the government to save the businesses on the brink of bankruptcy (their silence is deafening). Easter is traditionally the beginning of the 6 month period for the holiday industry to allow them to survive the winter. I will let you draw your own conclusion as to where UK holiday makers think they will stay this summer or more importantly summer 2021

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Chris M
By mr. mischief
02nd Apr 2020 14:17

Unless this is changed, we're going to see a lot of businesses which were viable on 1 January go bust, and a lot of staff doing perfectly valid and useful jobs will needlessly be made redundant.

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By SJH-ADVDIPMA
02nd Apr 2020 15:33

What a damp squib that scheme has turned out to be. As the government's bungled lock down threatens economic armagedon with forecasts of a 5th to one quarter of all business collapsing, it would have been just the solution. The criteria should have been if you have a going concern statement in your last audit, you qualify, and 100% is guaranteed, you can borrow upto 3 times your average bank balance.

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By Nina_Guinness
02nd Apr 2020 19:14

As AccountingWEB user sb3736 pointed out, “If the customer [is] forever liable, whatever happens, then what is the point of having a government guarantee in the first place?”

But thats ridiculous - these are loans not grants -

What would be the incentive for anybody to repay their loan if a 100% government guarantee meant the outstanding loan was never the responsibility of the borrower?

Backing 80% rather than 100% of the amount gives the banks the correct incentive to chase the entire loan, 20% loss on an unsecured commercial loan is a big big deal for a bank.

Please don’t let blind knee jerk emotional hatred of banks and bankers cloud your judgement.
We need intelligent thinking accountants in this crisis more than ever.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
03rd Apr 2020 11:34

I'm glad the article gave everyone a chance to vent their frustrations (and to speak up for the practical issues facing the banks).

You weren't the only ones raising those points and the Treasury responded this morning with a few tweaks and promises of further guidance later in the month. Here are the outline details (from update at the top of the article):

The qualification criteria have been relaxed in the following ways:
- Borrowers do not have to explore other commercial sources of finance first before seeking a business interruption loan
- Personal guarantees waived for loans under £250,000
- Businesses turning over up to £500m will be able to ask for loans of up to £25m
- CBILS will be offered at commercial rates of interest.

Will that be enough to open up the money pumps? Or will the tinkering just play to existing bureaucratic tendencies and game-playing? Maddy is digging into the latest announcement and seeking out some of the challenger banks and fintechs who are standing on the sidelines trying to get into the game.

Let us know here if you've got any quibbles with CBILS 2.0 or questions that you'd like answered and well see what we can find out.

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