Government revamps loan scheme for small businesses

The banks insist they were simply following the Treasury’s orders © Getty

published 10 April 2020

The recent overhaul of the government’s Coronavirus Business Interruption Loan Scheme (CBILS) should help more crisis-stricken small and medium-sized enterprises (SMEs) access support. The CBILS relies on a panel of 40 lenders under the supervision of the British Business Bank. Lenders can offer up to £5m to eligible firms, repayable over terms of up to six years, with the state guaranteeing 80% of each loan if the SME defaults.

But while lenders reported more than 130,000 enquiries from SMEs during the first ten days of the scheme, fewer than 1,000 businesses successfully applied, sparking recriminations. Government officials have criticised banks’ implementation of the scheme; banks say they simply followed the Treasury’s instructions.

Rectifying two problems

In an effort to break the logjam, ministers have now tweaked the CBILS rules to address two key criticisms. Firstly, banks pointed out that they had been told to assess whether SMEs would be eligible for an ordinary commercial loan; only firms that failed this test would be eligible for the rescue scheme. But now this rule has been dropped. Secondly, many banks said they wanted directors to guarantee their loans personally, even though the government had said this would not be required for finance worth less than £250,000. Now, banks have been told they cannot require such guarantees on loans beneath this threshold.

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The upshot is that any SME that would have been economically viable had it not been for Covid-19 will now be eligible to apply for finance. That’s important not just because assessments of SMEs’ eligibility for standard bank finance was causing delays, but also because under the CBILS, borrowers pay no set-up fees or interest in year one of the loan.

The new rule on personal guarantees could also be important. Many directors are understandably worried that their firm will not make it through the Covid-19 crisis even with emergency support; asking them to put their own assets on the line was unreasonable.

Nevertheless, many SMEs considering the scheme will still have some difficult questions to resolve. Do they want to saddle themselves with debt that may take many years to trade out of? And what will lenders charge for this debt? The Federation of Small Businesses wants interest rates capped at 6%, but there is no maximum and some lenders are thought to be considering rates as high as 35% on certain loans.

There are also doubts over whether lenders can cope with demand, with reports of long delays on phone lines. For some businesses time may already be running out. Still, the reforms to CBILS will be welcomed by many SMEs – and if you’re struggling in the face of the Covid-19 pandemic, it’s worth looking into what’s available. Remember that you don’t have to seek support from your current bank; the British Business Bank has details of all the lenders participating in the scheme and shopping around for the best terms and conditions will be important.

Can directors be furloughed too?

Following some initial confusion, the government has made it clear that company directors, including those appointed by their own personal service companies, will in some cases be able to claim help through its Job Retention Scheme.

This is the one that allows companies to put staff on temporary leave – or furlough – and claim a grant for 80% of the cost of their wages each month, up to a maximum of £2,500.

If you’re a director of a business that pays you through the PAYE system – as opposed to through dividends – you may also be able to use this scheme to support your income.

The company will formally have to place you on furlough, recording the detail in its company records. This means you won’t be able to do any further work, but if your business has dried up, this could be an effective way to claim help.

Importantly, the government has made it clear that company directors on furlough are allowed to fulfil their statutory duties without jeopardising their claim under the scheme.

So you’ll be able to work on company accounts, for example. Effectively, it is only work that generates an income for the company that is problematic.

Finally, similar arrangements apply to members of limited partnerships, assuming they’re treated as employees for tax purposes.

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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.