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29/04/2020

COVID19 loans – do they breach your existing financial arrangements?

Announcements from the Government and amendments to schemes have come at a fast pace over the last few weeks as they respond to reactions in the market for more flexible solutions. Loans and other funding schemes are now available for the full range of businesses, from start ups to the largest of enterprises.

The loan schemes are different from the grant schemes such as the Job Retention Scheme for furloughing employees because businesses will be expected to repay the money they borrow.

Businesses looking to borrow under the schemes to assist them through the impact of Covid19 should consider their terms carefully and, in particular, how they sit with existing borrowing arrangements in the business as failure to do so could unwittingly give rise to a breach of the terms of existing financial facilities and security arrangements that they have in place through their bank or other lenders.

If there is potential for a COVID19 loan to breach the existing facilities in place in a business then consent to the new funding should be sought from the existing lender(s) which they may or may not give. Identifying a need for consent from an existing lender and involving them in the process early could help to speed up the process of getting the COVID19 funding in place or avoid wasted time in pursuing an application for the new funding if the existing lender does not provide the necessary consent.

In addition, shareholders or others asked to provide personal guarantees in relation to any of the funding schemes should, as is always the case when any personal guarantee is required, take legal advice upon the guarantee to be given, indeed, this is, more often than not, a requirement of the lender.

There are now five main funding schemes:

  • Bounce Back Loans: for small businesses
  • Coronavirus Business Interruption Loan Scheme (CBILS): for SMEs.
  • Coronavirus Large Business Interruption Loan Scheme (CLBILS): for large businesses.
  • Future Fund: for early stage/venture capital backed businesses.
  • The Covid Corporate Financing Facility (CCFF): for the largest, investment-grade businesses.

The first five of these are being run by the British Business Bank. The last is being run by the Bank of England.

The Bounce Back Loan

This is the latest scheme which was announced on 27th April. Small businesses that are eligible are able to receive a loan of between £2,000 to £50,000 with a term of up to 6 years. There are no fees or interest to pay in the first 12 months nor will any loan repayments be due during that time. The Government will provide lenders with a 100% guarantee for the loan and there will be a low standardised level of interest for the period of the loan.

To apply the business must be based in the UK, have been negatively affected by the coronavirus and not have been an “undertaking in difficulty” on 31st December 2019.

The Bounce Back Loan scheme will launch on 4th May 2020 and will be available through a network of accredited lenders.

Coronavirus Business Interruption Loan Scheme

This was one of the first schemes to be announced and opened on Monday 6 April.

It is available to any UK business with a turnover of less than £45 million that is seeking up to £5 million in finance. The first 12 months’ interest payment and lender fees are covered by the government. But the borrower remains liable to repay the loan – which can have a term of up to six years. Applications for loans under the scheme must be made to one of more than 40 accredited lenders, and those lenders are the decision makers as to whether or not to grant the loan.

Take up of the scheme was slow but as of 23rd April 2020, it was reported that more than 16,600 companies had received loans under the scheme out of more than 36,000 applications. Most of those having been approved in the eight days prior to that. The government says that more than £300 million is being lent every day on average, taking the total lent under the scheme by that date to £2.8billion.

Coronavirus Large Business Interruption Loan Scheme

The CLBILS opened on Monday 20 April. It is open for any business with a turnover of more than £45 million. Those with a turnover from £45 million up to £250 million can be loaned up to £25 million; those with a turnover of over £250 million can be loaned up to £50 million.

Like the CBIL, applications for loans under the scheme must be made to an accredited lender. But unlike under the CBIL, borrowers are liable for all interest and fees, as well as repayment of the loan. The loan is to all intents and purposes a commercial loan at commercial rates of interest.

Future Fund

This scheme was announced on Monday 20th April. This scheme aims to support “innovative businesses” which “have been unable to access other government business support programmes…because they are either pre-revenue or pre-profit and typically rely on equity investment“. It is expected that applications will start in May 2020 and will initially be open until the end of September 2020.

The scheme is available for unlisted UK companies with “a substantive economic presence in the UK“. The company must have previously raised at least £250,000 in equity investment from third-party investors in the last five years.

The Fund may provide loans ranging from £125,000 to £5 million which can only be used for working capital purposes. The Fund’s investment will have to be matched by at least the same amount from third party investor(s). The loans will, in most cases, convert into equity (shares in the business). The government will therefore become an investor in the businesses which access the Future Fund.

There is still a need for clarity on this scheme in terms of what an innovative business is and who or what counts as a third party investor but, as with previous initiatives, we will have to wait for more information.

Covid Corporate Financing Facility

This was one of the earliest announced business support schemes but it seems that the CCFF is only available to the largest, most financially secure businesses.

To be eligible, companies must “make a material contribution to the UK economy“. And they must already have – or must have been financially sound enough on 1 March 2020 to acquire – an investment grade rating from one of the major credit ratings agencies or from at least two banks.

Under the facility, the Bank of England will buy commercial paper – unsecured, short-term debt instruments – issued by an eligible business. Companies must apply for the facility via a bank.

Please note that the above note highlights some, but not all, of the areas for borrowers to consider at this time and is not legal advice as the position may differ depending on individual circumstances.

If you have any queries relating to your finance documents please get in touch with Deborah Melluish at deborahmelluish@eatonsmith.co.uk or on 01484 821 413 or Alison Palmer at alisonpalmer@eatonsmith.co.uk or on 01484 821  431.