Although the government promised to help businesses struggling with coronavirus-related debt, the vast majority have been unable to access funds offered by the Coronavirus Business Interruption Loan Scheme.
The Coronavirus Business Interruption Loan Scheme was developed with the intention of allowing Small and Medium Enterprises (SMEs) access to funds via various forms of loans and finance. This is to substitute the stoppage in cash flow caused by unusual factors such as social distancing and the lack of custom which obviously comes along with that, providing they meet the eligibility criteria.
Chancellor of the Exchequer, Rishi Sunak, announced the scheme as part of the government’s measures to support people and businesses through the crisis:
Government to Support Jobs
“I want to reassure every British citizen; this government will give you all the tools you need to get through this. We will support jobs, we will support incomes, we will support businesses, and we will help you protect your loved ones. We will do whatever it takes.”
The UK Prime Minister Boris Johnson also made some bold promises a few weeks ago, as he stated small businesses that really needed the help would be able to apply for and receive funds that would help to ensure their survival, as it turns out only a disgracefully low amount have received this company-saving money. A mere 1.4% of applicants have received the funding promised to them by the government so far, which has been shattering news for many business owners that were relying on the aforementioned promises that were previously made to them.
The Guardian have reported, “Tens of thousands of firms are understood to have made formal applications, but amid accusations of excessive bureaucracy and a reluctance among lenders to make loans, only a fraction of them have been given the go-ahead. Sunak has reacted to criticism of slow progress by recruiting former Bank of England adviser Richard Sharp as a consultant with a brief to speed up the processing of rescue loans”.
The economy will only begin to suffer more if our businesses start to close down in a mass way. Companies such as Debenhams, Warehouse, and Oasis have all recently filed for administration, and more ventures of all sizes are unfortunately expected to follow.
City AM reports, “The dire expectations come with the UK economy in the midst of the worst recession since at least World War II, with businesses shuttered and the public indoors to halt the spread of coronavirus.
The UK’s budget watchdog on Tuesday warned that Britain’s GDP could crash by 35 per cent in the second quarter of the year. The collapsing economy has placed huge financial strain on households and businesses.
The reasons why businesses can’t access the funds?
Unfortunately, it seems that the government-lead funding schemes aren’t as accessible as many of us first thought they may have been, and many businesses are still seeing their applications denied. According to the British Chambers of Commerce, only 2% of UK firms have successfully secured funding via CBILS, with many struggling with the eligibility criteria, and banks’ insistence on personal guarantees and interest rates.
The problem a lot of small businesses are facing is that banks are still lending in accordance with their pre-lockdown criteria; carrying out credit checks as if it were business as usual. This withholding of funds and reluctance to lend means we could see a rise in the number of small and medium enterprises disappearing in the coming months.
Though in many cases like this a loanee’s home would be protected by law, other things such as personal savings, shares, and holiday homes would all be under potential threat. This has lead many to believe that business owners will steer away from getting the loans they so desperately need because of the collateral damage that may come with it, especially at a time like this where businesses are under so much pressure to just survive.
However, Royal Bank of Scotland, which also owns NatWest, has confirmed it will offer business interruption loans without asking business owners for personal guarantees – proving that more generous terms can be offered, but some banks are greedily refusing to acknowledge how businesses need help and are only hoping to make a profit from their personal worries and troubles.
The banks that have been acting immorally will now hopefully come under high amounts of pressure from business customers to copy RBS. In fact, Royal Bank of Scotland should be praised for their efforts and the work they have done to make a fairer system for those that are in dire need of help at this current moment in time.
Business Secretary Alok Sharma said:
“It would be completely unacceptable if any banks were unfairly refusing funds to good businesses in financial difficulty.”
However, Royal Bank of Scotland has insisted that funds distributed would increase following recent amendments to the scheme.
What are my options if I’m rejected?
While being rejected for government funding can feel like a major blow to a business, CBILS is not the only option to help with a deficit from the coronavirus. You can still apply for commercial finance without going through CBILS, and if your business is in an insolvent position, you can apply for one of several insolvency procedures to repay your liabilities and return to a profitable position.
Bounce Back loans – what we need to know
Due to small and medium sized business failing to gain approval on the Coronavirus Business Interruption Loan Scheme, the UK Government has developed bounce back loans.
So from the paper on the British business bank website its implying that the business must have been trading during 2019 – due to the 25% turnover restriction but then also says the business just have been established by 1st March 2020 – does this mean that new start up businesses are eligible and if so how will they self-declare turnover for periods under 1 year?
There doesn’t seem to many other restrictions on the loans – but it does say that decision making on borrower eligibility is devolved to the lender – does this mean that lenders will still be declining applications and for what reasons – false information, data not matching bank statements/accounts?
The big question is why don’t we have the information from lenders before the launch to ensure that businesses and borrowers understand the eligibility full and the impact it can have on them and their business.
Businesses applying for a Bounce Back Loan will amongst other things be required to self-declare that:
- It has been impacted by Covid-19
- It was not a “business in difficulty” at 31st December 2019 – it it was then the borrower must confirm it complies with additional state aid restrictions under de minimis state aid rules
- Is a business engaged in trading or commercial activity in the UK and was established by 1st March 2020
- It is not using Coronavirus Business Interruption Loan Scheme, the Large Business Interruption Loan Scheme or the Covid Corporate Financing Facility Scheme – unless the Bounce Back facility will refinance the whole facility. i.e under £50k you can change onto Bounce Back but cannot have both
- Its business is not in a restricted Sector
The scheme has been designed to be as straightforward as possible and will mean that the eligibility confirmations are self-certified by borrowers.
Other criteria include
- Must not exceed 25% of the turnover in the calendar year 2019, from a minimum of £2k to £50k
- Terms loans up to 6 years
- Early repayment is allowed at any stage without Early repayment charges/fees
- Personal Guarantees cannot be taken
- No Recovery action can be taken against a borrows primary private residence or primary personal vehicle
- No repayments during the first 12 months
- Lenders will have a 100% guarantee from the government
- 2.5% fixed interest rate
- No guarantee or scheme fees charged by the lender
Key Eligibility criteria for Bounce Back Loans
- UK Based businesses established by 1st March 2020
- Its not open to individuals other than sole traders or partners acting on behalf of a partnership
- Most industries are eligible except
- state funded education sector,
- entities providing insurance (other than insurance brokers),
- deposit taking banks
- Borrow must be able to self declare the details in the application
- A borrower must not be in bankruptcy or in debt restricting proceedings or liquidation – at time of application
- More than 50% of the income of the business must be from trading activity – except for charities or a further education college
Despite promising to help businesses affected by social distancing via the Coronavirus Business Interruption Loan Scheme, many SMEs are unable to access those said funds. The poor amount of funds being lent are far below the level that the government is aiming for, and the banks’ insistence on sticking to their pre-crisis lending criteria has reduced that amount even further.
In response, some banks are looking to address this issue and increase the rate of lending. If you have been turned down for CBILS, or your business isn’t suitable for the scheme, you can still access commercial finance, or insolvency procedures if they would be more fitting for your circumstances. So, overlook your ongoing business plan and examine which strategy you’ll deploy, as a solution to keep your business venture afloat.