Public support schemes for small and medium-sized businesses
Updated on 7 April 2020
The Chancellor has set out a package of measures to support small and medium-sized businesses through the disruption caused by Covid-19. This alert focuses on the Coronavirus Business Interruption Loan Scheme (“CBILS”) and the Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (“TFSME”).
The Coronavirus Business Interruption Loan Scheme
Under the CBILS, funding is provided to businesses through accredited lenders. The CBILS provides the lender with a government-backed, partial guarantee (80%) managed through the British Business Bank (the “BBB”) against the outstanding facility balance, subject to an overall cap per lender.
In the first instance, businesses should approach their own provider – ideally via the lender’s website. Businesses should also consider approaching other lenders if they are unable to access the finance they need. Decision-making on whether the relevant business is eligible for CBILS is fully delegated to the 40+ accredited CBILS lenders.
Key features of the scheme:
- Timing: the scheme went live on 23 March 2020 and will run for an initial period of 6 months.
- Size: the maximum value of facilities that will be backed under the scheme is £5 million. The government will provide the lender with a guarantee of 80% of the outstanding facility balance (subject to an overall cap per lender/portfolio). However, the borrower will, at all points, remain 100% liable for the repayment of the debt.
- Fees and interest payments: SMEs will not be required to pay any fee to access the CBILS but the lenders will pay a fee to access the scheme. The lenders’ guidance provides detail on how that fee is calculated and the calculation broadly depends on factors such as the term of the loan and the type of counterparty. The government will also cover any lender levied fees (such as arrangement fees or early repayment charges) as well as the interest for the first 12 months subject to a cap. These payments will be covered by the Business Interruption Payment (BIP), which is a payment separate to pay-outs under the guarantee. Lenders can invoice the BBB on a quarterly basis to receive payment under the BIP. In addition, some lenders have indicated that they will not charge arrangement fees or early repayment charges to SMEs borrowing under the scheme.
- SMEs from all sectors may apply, subject to certain exceptions:
- banks, building societies, insurers and reinsurers (but not insurance brokers);
- the public sector including state funded primary and secondary schools; and
- employer, professional, religious or political membership organisation or trade unions.
- The SME must have an annual turnover of not more than £45 million (assessed on the basis of the group undertaking – which is defined to include entities which are under common legal or de facto control). More than 50% of this turnover must be generated from trading activity.
- The SME must be UK based in its business activity – although the current guidelines do not require the business to be specifically UK incorporated.
- The SME must also present a borrowing proposal which, were it not for the COVID-19 pandemic, would be considered viable by the lender.
- CBILS is currently available only through the BBB’s accredited lenders, whose details are listed on the BBB website.
- The lenders listed on the BBB website include high street banks such as Barclays, RBS, HBSC and Natwest as well as challenger banks. Not all lenders are accredited for all product types.
- Products covered: CBILS support will cover a range of products - (i) term loans; (ii) overdrafts; (iii) invoice financing; and (iv) asset financing.
- Term: Term loans and asset finance will be supported by guarantee facilities on repayment terms up to 6 years, whereas overdrafts and invoice finance facilities will be supported for a term of up to 3 years.
- Security: The security package may be determined at the discretion of the lender. The terms of the CBILS have been amended so that insufficient security is no longer a condition to access the scheme. For all facilities, including those over £250,000, the CBILS can now support lending to smaller businesses even where a lender considers there to be sufficient security. Personal guarantees are not permitted for facilities under £250,000, but may still be required, at a lender’s discretion, for facilities above £250,000. Personal guarantees exclude the Principal Private Residence (PPR) and recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied.
The government also announced a new Coronavirus Large Business Interruption Loan Scheme (CLBILS) which will provide a partial guarantee of 80% to enable banks to make loans of up to £25 million to firms with an annual turnover of between £45 million and £500 million. The CLBILS will launch later this month. For more details, read our dedicated webpage.
Term Funding scheme with additional incentives for Small and Medium-sized Enterprises
Conceptually similar to other BoE facilities, the TFSME will offer 4-year funding to participants on rates at or close to the Bank Rate (which is now reduced to 0.1%) against the provision of eligible collateral (subject to haircuts) by those participants.The BoE has clarified that all three types of collateral under the BoE’s sterling monetary framework are eligible (Level A being assets expected to remain liquid in almost all market conditions, such as high-quality sovereign debt, Level B consisting of assets that will normally be liquid, such as sovereign debt, supranational and private sector debt and the highest-quality asset-backed securities and Level C comprising of less liquid assets, such as securitisations and loan portfolios).
The TFSME can also be used to fund other corporates, however, the focus seems to be to make additional lending available to the real economy, and especially SMEs.
The BoE expectation is that over the next 12 months the TFSME will offer funding of at least 10% of participants’ share of real economy lending. Its experience from the existing Term Funding Scheme (TFS) which ran from September 2016 to February 2018 and is closed to new drawings suggests that the TFSME could provide in excess of £100 billion in term funding.
On 6 April, the BoE announced that drawings under the TFSME will open on 15 April 2020. Drawdowns may be undertaken on each business day during the Drawdown Period (15 April 2020 - 30 April 2021). The term of each transaction will be for four years from the date of drawdown. Participants may terminate any transaction, in part or in full, before its maturity date. The BoE will charge interest on TFSME transactions equal to Bank Rate plus a Scheme fee (TFSME Fee).
Participants (within a given TFSME group of related firms) may draw down an amount up to their “Borrowing Allowance”. This is calculated from an “Initial Allowance” based on the amount of their lending, plus an “Additional Allowance”. The Additional Allowance is scaled depending on the amount of the participant’s lending with: (i) a 1x scaler for its lending to UK resident households, large corporates and certain non-bank credit providers; and (ii) a 5x scaler for its lending to SMEs.