The Coronavirus Business Interruption Loan Scheme: A Quick Guide For Accountants
With the coronavirus COVID-19 pandemic bringing mayhem to the UK economy, Chancellor Rishi Sunak announced a suite of measures back in March to help businesses weather the storm. A key option open to SME businesses was unveiled as part of these measures - the Coronavirus Business Interruption Loan Scheme (CBILS).
As the situation continues to change all businesses will need to adapt. Business accountants will also need to be au fait with CBILs as it potentially evolves. Here we look at the CBILS more closely, so that you can assist your small business clients fully as their trusted business accountant.
What is CBILS?
The Coronavirus Business Interruption Scheme (CBILS) offers financial support to small and medium sized businesses across the UK that have seen their cash flow dwindle due to coronavirus. The help is accessible from over 40 accredited lenders listed on the British Business Bank’s website.
The government wants to encourage banks to lend money to small businesses, particularly during these difficult times. The CBILS initiative works by underwriting 80% of the value of eligible finance facilities of up to £5 million, to help otherwise viable businesses prop up their cash flow through the COVID-19 uncertainty. Lenders therefore are taking less risk, therefore may be encouraged to provide credit for businesses that are temporarily struggling which may otherwise be turned down.
Why has there been a need for the scheme?
When Boris Johnson announced the coronavirus lockdown back on the 23rd March, many small businesses closed overnight. Others faced cancelled orders, staff shortages and a whole range of issues that meant their cash flow was severely compromised. Even once the lockdown ends, COVID-19 is likely to hang over us for quite some time to come, bringing even more economic misery. CBILS allows companies to access fast, government-backed loans which can be repaid when trading returns to normal.
What are the key features of the CBILS scheme?
Here are the key fact you need to know:
- Companies that qualify can borrow up to £5 million
- Borrowers are 100% liable for the debt
- The scheme offers lenders a partial guarantee of 80% of the loan value which is backed by the government (note that each lender has its own cap)
- The government will pay the interest and fees relating to loan for the first year
- Loans can be taken for periods of up to six years. For invoice finance facilities and overdrafts it’s 3 years
How will I know if my client is eligible for the CBILS?
Businesses must be UK-based and viable with annual turnover of no more than £45 million to be eligible for the CBILS. If you client’s business has a turnover between £45million and £500 million, the Coronavirus Large Business Interruption Loan Scheme (CLBILS) should be used instead. With this larger scheme, the government will guarantee 80% of loans to a maximum of £25 million for businesses with turnover of between £45million and £250million. This maximum amount increases to £50million for businesses with a turnover of £250 million to £500 million. Where CBILS loans can be spread across 6 years, CLBILS loans can span periods of between 3 months and 3 years.
For very large companies with a turnover that exceeds £500 million a year, the Covid Corporate Financing Facility has been unveiled.
Additionally, regardless of turnover, companies must:
- Be a viable business that could easily have supported debt if it wasn’t for COVID-19, and will continue to be viable in future
- Not be in one of the ineligible sectors. These include banks, building societies, public sector organisations, insurers, reinsurers, religious, trade unions or political or professional membership organisations
- Generate 50% or more of their income from the sale of products or services
What is the borrowing limit?
Loan amounts cannot exceed twice the annual wage bill of the company for 2019, or for the last year available. This includes employees and subcontractors.
For undertakings created on or after 1st January 2019, maximum loan amounts must not exceed the estimated annual wage bill for the first two years in business, or
- 25% of total turnover of the company in 2019, or
- The company’s liquidity requirement for 18 months
This is subject to a maximum facility amount of £5 million.
How should clients apply?
To see if a business qualifies for a CBILS backed loan, they should first contact their current banking provider to see if any of their existing products would suit better. If the CBILS scheme is definitely the way forward, they should use the British Business Bank’s website to look for an accredited lender and follow the application process.
What security is needed to get a CBILS-backed loan?
A business owners’ primary business or residential address can’t be used as security for CBILS backed loans. However, accredited lenders involved in the scheme will still conduct their usual affordability checks against their own lending criteria. Lenders will also offer loans at their own discretion and, apply their normal underwriting criteria and security requirements when offering CBILS backed finance.
Rishi Sunak also announced on the 3rd April that no personal guarantees can be taken on CBILS backed loans of less than £250,000. For loans exceeding this amount, recoveries are capped at 20% of the remaining balance.
It’s important to note that the borrower will be liable for the entire amount of the debt regardless of how much is borrowed. It’s the lender that benefits from the government backing, not the borrower.
Don’t forget R&D Tax Credits too
Another valuable financial injection for innovative businesses comes in the form of R&D Tax Credits – a tax incentive that covers the cost of a range of research and development activities. If your client has recently designed or improved a product, service or process that has required technological or scientific research, then they may well be eligible for a cash injection they can spend as they wish. Take a look at our Tax Cloud portal for accountants to find out more how to apply. You can also call Myriad Associates - the R&D tax experts behind the Tax Cloud - on 0207 360 4437 or use our contact page.