Directors may worry that they may not be able to pay back CBILS loans that have been granted to their companies during the pandemic. We discuss that here. But, first of all it is important to know what the loan was intended for and the conditions attached, so we begin with a loan overview.
Coronavirus Business Interruption Loan Scheme (CBILS):
This scheme provides facilities of up to £5m for small to medium enterprises who are experiencing cashflow issues as a result of the pandemic. Through the Coronavirus Large Business Interruption Loan Scheme which followed the initial CBILS, up to £50m is offered (£200m as of 26 May) for firms with revenues between £45m and £500m.
CBILS are available for most business finance products such as;
- term loans,
- invoice finance
- asset finance.
The scheme provides the lender with a government-backed guarantee potentially enabling a ‘no’ credit decision from a lender to become a ‘yes’.
CBILS: Key Features
- Up to £5m facility repayable over a period of up to 6 years (SMES) or £50m (£200m as of 26 May) for larger businesses
- 80% guarantee to the Lender
- Interest and fees paid by Government for 12 months
- Overdrafts and Invoice Finance for 3 years
- Security: At the discretion of the lender, the scheme may be used for unsecured lending for facilities of £250,000 and under. For facilities above £250,000, the lender must establish a lack or absence of security prior to businesses using CBILS. If the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will do so.
- When borrowing up to £250,000, a personal guarantee is not required
- Companies taking out these loans are 100% liable for the debt and there are no restrictions on the interest rates banks charge
- A term extension beyond 6 years, up to a maximum of 10 years for existing CBILS facilities can be made in connection with the provision of forbearance relating to the facility, at the discretion of the lender if within its usual forbearance policies.
Who is eligible for this loan?
Smaller businesses from all sectors can apply for the full amount of the facility. To be eligible for a facility under CBILS, the SME must:
- Be UK-based in its business activity, with annual turnover of up to £45m (or up to £500m to be eligible for the Coronavirus Larger Business Interruption Loan Scheme)
- Have a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable the business to trade out of any short-to-medium term difficulty.
- Previously businesses which were classed as ‘undertakings in difficulty’ were unable to access CBILS because of EU rules. Now businesses in this category and which have fewer than 50 employees and a turnover of less than £9 million can apply to CBILS.
Applications for CBILS loans close on the 31st March 2021. After that they are going to be replaced by the Recovery Loan Scheme (RLS)
What can the company use CBILS loans for?
You may you use the loans to pay staff wages (directors included). It can also be used to help with rents and business rates, any monthly business costs or overheads such as phone and electricity bills. Finally, directors may wish to use it to refinance other business debts to lower the interest costs related.
CBILS loans cannot be used to pay dividends or to pay into a personal savings account to accrue interest. It cannot be used for any purposes other than those business related. To do so would not be “acting reasonably and responsibly” and you could be made personally liable if the company enters into voluntary or compulsory liquidation.
What if we KNOW we can’t pay back CBILS loans?
Advice from us, as a company rescue firm, is this: DO NOT run down the CBILS cash until there is nothing left to pay creditors, wages or to cover the cost of a liquidation. Same applies for Bounce Back Loans as well.
We are aware that may non-viable companies have taken out these loans. In fact, the government loosened the criteria for these loans so that companies marked by lenders as "undertakings in difficulty" could apply for these loans. So ultimately, if your company is unable to pay back this emergency loan, it is not too much of a problem, if you have acted “reasonably and responsibly as a company director”. The government are aware and this was expected. But perhaps one thing that was not expected was how long the period of the COVID crisis would be!
Companies that took out this loan and thought that after a few months of severe effects of the pandemic, it would be possible to start repaying the amount are now stuck. The issue of being unable to repay the loan is building up.
Remember that if you are unable to pay back this emergency loan, then you risk your credit rating being affected at the bank which can limit your attractiveness to future lenders.
CBILS loans in excess of £250,000 are often backed up by directors’ personal guarantees so unfortunately there will not be a way out of that. On the other hand, for loans below the value of £250,000 you may be held personally liable and the ‘’veil of incorporation’’ may be lifted on the limited company if you have acted unreasonably.
If you are in a hole then the usual advice is to stop digging! Do not run away from the issue nor make it worse. Face reality and assess the likelihood…your business may well be insolvent. Check out our pages, complete the insolvency tests and read our warning signs – do these apply or sound familiar? The most important thing if you find yourself in this situation is to ACT. Especially given that the factors involved here, personal guarantees, insolvency, liabilities. So, reach out and get professional assistance today!