The initial shock of the Pandemic is over but giving way to the second wave. Chancellor Rishi Sunak is urgently directing his gaze to extend support to business as the ‘V shaped recovery’ is threatening to look more like a U or an L for many businesses.
A significant flaw in the BBLS and CBILS scheme is emerging, which many lenders are exploiting and which thus far has evaded the Treasury’s attention. Borrowers can have either a BBLS loan or a CBILS loan, but not both.
What can the Chancellor do to remedy the problem? Allow small companies to keep their BBLS loans and access CBILS for their surplus funding requirement.
When CBILS failed to deliver funds to cash shocked businesses at the beginning of the Pandemic, the Chancellor carved a fast route to cash for smaller business which was effective but came with a sting in the tail.
Under BBLS a qualifying business can raise unto 25% of their annual turnover up to a maximum 50K. Critically there are no PGs, the debt is 100% underwritten, and the interest rate is fixed at 2.5% for the term of the loan – with the government covering the first year. CBILS loans, on the other hand, have just 80% underwritten by the state so banks must look carefully at the borrower who has to cover the other 20%. This requires the business to be robust, as the lender can’t ask for personal guarantees on loans up to £250,000.
Critically, you cannot have a BBLS loan outstanding if you need a CBILS Loan.
The effect of this on a business turning over, say £400,000 pa which requires £100,000 loan to ride the COVID storm, is to either borrow £50,000 on a BBLS loan at 2.5% pa and fund the balance commercially at say 7%. In that instance the borrower will have to issue PGs for the £50,000 commercial borrowing. The alternative is to pay considerably more interest overall and convert all of their borrowings to CBILS.
A typical CBILS loan will cost 7% but for the full £100,000 required. The borrower does have 20% of the liability (but no PGs on loans up to £250,000). This reduces the company liability on default to £20,000, instead of £50,000 on regular commercial terms and crucially no personal guarantees; however, the total annual interest cost goes from £4500 to £7000.
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