The possibility of businesses needing further funding to manage the implications of the Covid-19 lockdown is increasing as the period of reduced activity looks likely to extend beyond what many first envisaged. What lessons can be learned from the first phase of CBILs applications to assist those looking to increase their working capital?
By common consent, the view of the majority when the lockdown was announced in late March was that we would see a period of two to three months of severely curtailed economic activity followed by a return to normality or something approaching it. A large number of businesses prepared their forecasts on this underlying assumption. On this basis, we are now approaching the point where the switch was expected to be flicked back on.
A strategy of minimising expenditure through April, May and June and supplementing income through the funding options provided by the government seemed entirely reasonable. Many businesses applied for Coronavirus Business Interruption Loans (CBILs) in the early part of April, but to date, only about 50% have been successful. The later launched CBBL has seen a much higher success rate (75%) and even though the maximum advance is capped at £50,000 a higher value lent in absolute terms, by just over 30%.
As businesses contemplate a further period of “lesser” activity and potentially an “L’ rather than “U” shape recovery, the possibility of requiring additional funding looms large. The government has explicitly stated that it is possible to convert a CBBL into a CBIL to access funding over the £50,000 limit of the CBBL.
The information flowing back from the banks and professional bodies in the last few weeks indicates that, as we expected, CBILs have proved more challenging to obtain than the government intended.
The prima-facie evidence of this was provided by the instant take-up and drawdown of the Bounce Back Loans. Subsequently, it has become apparent that CBILs, which for the banks are more complex and expensive to put in place, and less “profitable” was never going to be a preferred way of funding their customers.
Banks appear to have taken the view that, for their ideal customers, they would prefer to assist using a typical commercial loan. Such customers, who were doing well before the Covid-19 pandemic and will, in all probability return to profitability after, were not those which required the government guarantee to support the lending.
For those companies which banks determined were not reasonable risks, the offer of an 80% guarantee by the government was not the issue. I learnt early in my three-year career in banking that you do not lend on security but the ability to repay. It is in such a context that banks no-lend decisions have been made.
But, there are several positives with regard to CBILs, which business owners and managers should draw encouragement from.
First, a large number of CBILs applications were purportedly made by organisations that were already in some financial difficulty before the pandemic. The failure of these pplications have skewed the stats significantly.
Secondly, I am led to believe that many applications with merit were not presented in a logical, professional format or accompanied by appropriate financial information – a far higher proportion for CBILs than is usual.
Further, the banks seem to have approved a disproportionately large number of CBILs where their preparation was carried out by or overseen by an independent professional. Someone such as myself who worked with the directors to prepare, review, critique and then submit the application. For those of us who are accredited by their professional bodies and known to the banks, this adds a significant amount of credibility to the application.
And of course, the standard commercial loan application process remains open.
