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How will the government further assist businesses to trade out of the crisis in 2021?

EFG+, but plus what? Kirsty McGregor explains what we believe could replace CBILS next year.

Kirsty McGregor Dec 14, 2020

According to a recent ACCA/CFN survey, 8 out of 10 accountants state that the SMEs they represent are not fully aware of their funding requirements and financial risk over the next six months. The accounting profession has done a phenomenal job in supporting small businesses over the last nine months, ensuring that their clients are prepared to trade out of this pandemic. The Government has worked with the British Business Bank and the diverse UK lending community to create four government-backed loan schemes to assist businesses at all stages of their lifecycle and of all sizes. According to numbers, this has been an outstanding success.  

 

These statistics were reported as at 16th November 2020:

Source - British Business Bank 

This equates to a total of over £66bn of new loans approved within a matter of months. The UK has never experienced lending on this scale, or at such low rates. 

To put that into context, the chart from Bank of England (see below), shows the annual growth of lending to businesses. When compared to last year, there is a very steep increase in lending during Q2 and Q3 2020.

Source - Bank of England 

And yet, seemingly accountants are still worried that this will not be sufficient liquidity for their clients. 

 

What comes next?

As the four government backed loan schemes come to an end on 31st January 2021, it is worth considering how accountants will be able to further support their clients next year, and take a look forward to what else the Government may be able to do, or indeed how the wider commercial lending market will fit in.

We expect that the job retention scheme will end on 31st January and there will be no more grants for the self-employed to support them with lower trading levels. The Government will be looking towards recovery and will most likely change their focus to only financing grant schemes via the Local Enterprise Partnerships and the enterprise bodies in the devolved nations to support the creation of new jobs.  

If these grant funds are structured in a similar way to previous initiatives, they will most likely only be matched funding and the businesses will still be required to finance an element of the cost themselves. Cash reserves have been depleted for most businesses, so having access to new forms of capital will be essential if they are to be able to access these grants. Most businesses will again turn to the lending market to provide this liquidity.

 

EFG+, but plus what?

Lending in the developed world has historically always required tangible assets from within the business, plus often supported by personal assets of the directors and shareholders. The Government has provided a guaranteed-loan product since the inception of the Small Firms Loan Guarantee Scheme in 1981 which ran to January 2009, which was then replaced by the Enterprise Finance Guarantee Scheme in the same month. It is this scheme which formed the basis for The Coronavirus Business Interruption Loan Scheme (CBILS). 

CBILS has resulted in far greater volumes of loans than the EFG. CBILS has brought a level of demand which has never been seen before, enabling a huge growth of acceptable lending in a period of need for the economy. This has happened for several reasons:

  1. The lenders preferred the security mechanism. The government security mechanism restricted the cases which the lenders were willing to underwrite under the EFG scheme but this has been substantially rewritten under CBILS, giving the lenders more comfort.
  2. The borrowers preferred the terms of the security. The average loan for CBILS was below the Personal Guarantee threshold of £250k, demonstrating that this cap has given many business owners the comfort to believe that taking on this new debt is a manageable risk.
  3. The borrowers thought the impact on their cash flow was acceptable. The cost of the loans were typically lower than other commercial lending as the government is paying the lender’s fees and interest for the first year. Twelve month capital repayment holidays also brought a cash flow benefit which provided some breathing space for the businesses to trade out of the various lockdowns and restrictions on their companies. 

 

However, CBILS wasn’t considered to be working adequately to meet the needs of the smallest businesses and by early May, the Bounce Back Loan was also devised for those business owners who only required less than £50k loan and who were able to self-certify their income and the impact of the virus on their business. This removed the need for underwriting, leaving the banks with the requirement to only carry out checks for Anti-Money Laundering and anti-fraud, speeding up the application and approval process and releasing the pressure on the lenders’ human resources. 

The Treasury has stated their intention to provide one replacement scheme once these coronavirus schemes end, but little is known about what their ideas are. The lending community is discussing this and most are expecting something similar to EFG, but maybe with some more relaxed criteria? 


Let’s consider the main components of the previous EFG, CBILS and where EFG+ may fit in.

  EFG  CBILS  EFG+ (Capitalise Prediction)
Government security 75% 80% 75% as EFG

Other costs

 

 

 

 

2% annual guarantee fee to BEIS

Arrangement fees to the lender

Interest as set by the lender

No guarantee fee payable

First 12 months of interest and lender-levied fees covered

 

As EFG

 

 

 

 

Loan facilities

 

 

£1,000 - £1.2m

 

 

£50k - £5m

Subject to max of 25% turnover or 2x annual wage cost

£1,000 to £5m

 

 

Term 

 

 

3 months - 10 years (3 year limit for overdrafts and invoice finance)

< 10 years (most lenders offer max of 3 years or 5 years)

As EFG

 

 

Products

 

 

 

Term loans, invoice finance, revolving credit,  asset finance

 

Term loans, invoice finance, property finance, asset finance, revolving credit, merchant cash advance

As CBILS 

 

 

 

Maximum
company size

 

 

 

Turnover max £41m

 

 

 

Consolidated group Turnover max £45m
(CLBILS available for larger companies)

 

As CBILS with a possible EFG++ scheme for larger companies

 

 

Acceptable use

 

For business purposes in the UK

For business purposes, to support trading in the UK

As CBILS

 

Sector restrictions

 

 

 

 

Some - including those providing  finance or insurance,  education sector, fisheries, agriculture 

 

 

Banks, insurers and reinsurers (but not insurance brokers); public-sector bodies and state-funded primary and secondary schools

As CBILS

 

 

 

 

Accredited Lenders Around 40 > 100 As CBILS

Personal guarantees 

 

 

 

 

PGs will be taken

Charges over principal private residence may also be taken

 

 

 

PGs won’t be taken for facilities <£250k; at lender’s discretion >£250k then max 20% of the outstanding balance 

Principal Private Residence (PPR) cannot be taken as security to support a PG

As EFG

 

 

 

 

 

Other requirments 

 

 

 

 

 

A viable proposal for a business which is not in financial distress;

Charges over other corporate and personal security have already been granted to a lender

Business must have been viable pre-Covid

Must have been adversely impacted by pandemic;

Must be able to meet the capital repayments and interest

As EFG

 

 

 

 

 

Other issues for lenders

 

 

 

Refinancing is limited to a maximum 20% of a lender’s annual EFG portfolio

Max claim 13% of the total amount lent under EFG, at 75% = 9.75%

Refinancing limits were agreed for each lender

There is no recovery cap on the lender’s total loan portfolio

 

As CBILS 

 

 

 

 

Given the government’s record for announcing schemes which economists had never expected from a Conservative Government, they could completely surprise everyone again and the criteria for EFG+ could be wildly different to the predictions above. However, it is widely accepted that any new scheme is unlikely to be as preferable as the current CBILS and CLBILS terms.

The government will need to provide a scheme to facilitate future lending on a commercial basis, where they can still support those businesses who’s proposal encourages growth in the economy, but where there is a shortfall in tangible assets for security.   

To be successful, this new scheme needs to ensure it provides both lenders and borrowers with terms which are acceptable, so several of the elements should mimic the CBILS scheme rather than the EFG scheme. 

If there is security available for a lending proposal, then the business will be required to turn to the normal commercial lending products available in the wider market. 

 

Commercial lending

All lenders have undergone a massive shift during this pandemic. Tier 1 lenders have been forced to cope with a huge demand on their resources, both capital and internal, at a time when they had streamlined their business banking teams. They are expecting this drain on their time to continue - most banks have recruited to strengthen their Recovery and Collections teams as their focus will be to support the millions lent over these past few months. Their appetite for new lending may be restricted by liquidity issues, regulatory requirements and the more practical issue of time.

Those fintech and alternative lenders who didn’t offer CBILS or Bounce Back Loans in great numbers have found that the demand for other financial products has plummeted.  Several have had to restructure and make redundancies. The financing landscape has needed to change to cope with the ‘new normal’ too. 

 

How Capitalise can help

In this year alone, we’ve seen both how much business owners need help raising capital and how quickly the ways to access it have shifted.

Businesses and their accountants will need to keep up with the availability of products and lenders in the market over the coming months. 

Capitalise helps accountants identify and uncover where to focus their efforts to grow their business advisory services, removing the guesswork as to how to best help their clients raise, recover and protect capital. 

Our capital advisory solution brings together 100+ lenders, debt recovery and tax solutions into a single platform. 

Now accountants can open up the world of possibilities for their clients.

 

Christmas on Capitalise

If you'd like to carry on the conversation about how we can help you to help your clients please book in a consultation. We'll explore how to use Capitalise to help your clients prepare for 2021, we'll also send you a Christmas hamper for simply attending. 

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