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Government announces 100% guarantee of loans up to £50,000 under the Coronavirus Business Interruption Loan Scheme

On 27 April the government announced that it will provide a 100% guarantee for loans of up to £50,000 under the Coronavirus Business Interruption Loan Scheme (the CBIL Scheme). The Chancellor, Rishi Sunak, had been coming under pressure to extend the government guarantee from 80% to 100% as businesses found the CBIL Scheme difficult to access. The threshold of £50,000 is lower than many have been asking for, and the Chancellor may come under further pressure to increase the government's guarantee to help SMEs.

Background to the CBIL Scheme

The CBIL Scheme enables UK businesses (including sole traders and partnerships) to borrow up to £5million for a term of up to six years from 40 accredited lenders. The government will pay any arrangement fees levied by the lender, as well as the first 12 months of interest payments.

In order to qualify for a loan under the CBIL Scheme, the business must be UK based with an annual group turnover of no more than £45million. It must have a borrowing proposal which the lender would consider viable were it not for the current pandemic, and it also needs to self-certify that it has been adversely impacted by COVID-19. Lenders have the benefit of a government-backed guarantee of 80% on the amount they lend.

The government had to quickly revamp the CBIL Scheme following its initial introduction, which included:

  • removing the requirement that lenders should only offer a loan where they would not be prepared to provide a facility to the borrower under normal commercial terms - loans are now available to businesses even where the lender would be prepared to offer a facility outside of the CBIL Scheme;
  • preventing lenders from requesting personal guarantees for loans under £250,000;
  • introducing the Coronavirus Large Business Interruption Loan Scheme under which businesses with a turnover of between £45million and £250million can borrow up to £25million, and those with a turnover of more than £250million can apply to borrow up to £50million, with the government providing lenders a guarantee covering 80% of the amount borrowed.

The British Business Bank has also clarified that, where a business has a private equity investor (even one which holds a majority or controlling stake), the business can still be eligible for a loan under the CBIL Scheme. When assessing whether its turnover is under £45million, the business will be considered separately to the private equity investor and its other investments.

There has, however, been growing pressure on the government to expand the CBIL Scheme further and provide a 100% guarantee on the amount advanced to borrowers. The Chancellor's announcement on 27 April expanding the government guarantee to 100% for loans up to £50,000 has been widely applauded, but there will be mounting pressure on the government to raise this threshold.

Whilst the 80% guarantee provided by the government is a significant amount, the banks could still stand to lose up to one-fifth of the amount advanced to borrowers should they be unable to repay their loan. As such, lenders (understandably) are not prepared to suspend their normal credit checks.

It is argued that increasing the government guarantee to cover 100% of the amount borrowed would speed up the application process and ensure that small and medium businesses receive the financial assistance they urgently require. Critics point to the system put in place in Switzerland, where loans are backed by a 100% guarantee from the Swiss government.

Under the Swiss scheme there is currently a cap of SFr500,000 (around £415,000 at current exchange rates) on those loans which are guaranteed in full by the government. This is considerably less than the £5million available to eligible businesses under the CBIL Scheme. Those loans that exceed SFr500,000 are backed by a government guarantee covering 85% of the total amount advanced.

28 April 2020

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