Pandemic’s Effect on the Economy
COVID-19 has had a severe impact on the economies all around the world. Britain has not been an exception. The volume of British retail sales dropped 5.1% in March compared to February and in April a record 20.4% drop in GDP has been recorded. It has been estimated that small businesses will lose around £69bn due to trading stoppage. Due to many jobs being lost as more and more companies shut down their operations the unemployment rates have increased in all major economies with the number reaching 10.4% in the US.
With virtually all companies and especially SMEs being affected by the pandemic the UK government has introduced Coronavirus (COVID-19) Business Support in order to help those businesses and speed the economic recovery.
What is CBILS
CBILS was introduced by the UK government as part of Coronavirus (COVID-19) Business Support and is managed by the British Business Bank. The scheme prioritises small and medium-sized businesses by giving them access to loans up to £5 million. Not only that, but the government also guarantees 80% of the finance to the lender and the business using the scheme doesn’t have to pay any fees in the first 12 months as the government also pays interest and any other fees. CBILS covers different types of finance: business loans, overdrafts, invoice finance and asset finance. The latest CBILS update came out on 1 May 2020, stating that further education establishments are also eligible for the CBILS and portfolio-level cap on a lender’s claims on the government guarantee has also been removed.
The scheme was launched on 23 March 2020 and will be available for six months - businesses must apply before 23 September 2020 to be accepted for a loan.
There are several CBILS criteria that have to be met. The business must be based in the UK and have an annual turnover of below £45 million. The business can be foreign-owned as long as its core business operations take place in the UK. This turnover value is a criteria used to class businesses as SME under CBILS. Not all sectors are eligible for the CBILS. Banks, insurers, reinsurers, public-sector bodies, state-funded primary and secondary schools are the businesses listed on the CBILS UK government page deemed ineligible to the scheme. The potential borrower must also be able to show that the pandemic has had a severe effect on the business. Even though the size of the loan goes up as high as £5 million as mentioned previously not all businesses are eligible for the loan of this size. If the enterprise was classed as a business in difficulty on 31 December 2019 then the size of the loan is capped at £30,000. If your business is not eligible for CBILS do not worry - there are other government loan schemes available, for example, Bounce Back Loan Scheme (BBLS).
There are currently over 50 accredited CBILS lenders. To apply for finance the borrower must approach the lender directly via the lender’s website. Then the business negotiates the amount it would like to borrow, what the money will be used for and the length of the loan. The borrower will also be asked to provide supporting information on the business’s finances to show that it will be able to afford the repayments as the business remains 100% liable for the debt. The required supporting documentation varies from lender to lender depending but most definitely likely to include:
- Management accounts
- Business plan
- Historic plan
- Details of business assets
- Cash flow forecast
The lender then makes the decision on whether the loan should be given. There are no limits on how many times you can apply for the CBILS. This means if one lender turns you down you can still contact other lenders about the CBILS loan. However, businesses cannot apply both for CBILS and for a Bounce Back Loan.
Even though the borrower is 100% liable no matter what size of the loan is taken, CBILS lenders are not allowed to take personal guarantees of any form for loans below £250,000.
The length of the loan as stated previously is decided by the lender. Typically for term loans and asset finance, it is up to six years. For overdrafts and invoice finance it is up to three years.
Relief Packages Around the World
Virtually all countries and their economies have been affected by COVID-19, so it is not surprising that the UK was not the only country to provide a state-aid to businesses. The EU has introduced the Coronavirus Response Investment Initiative - €37bn investment package aimed to support its Member States. €8bn of liquidity will be made available immediately to the Member States and if fully used, will be complemented by €29bn. The EU recommends prioritising spending on healthcare, SME support and short-term employment schemes.
The countries in the EU have also launched their own schemes to try and stabilise the economy. The German Bundestag and the Federal Council have introduced “Corona-Schutzchild” (Corona-shield) package which has become the largest aid package in the German History. To finance this historical package the German government is taking out loans totalling €156bn. The money will be allocated to healthcare, families suffering from COVID-19 outbreak and to support SMEs. As part of the program, the German government will also introduce tax relief measures, including tax payments deferrals and permitting pharmacies to use alcohol tax-free due to the surging demand for disinfectants.
Two Spanish guarantee schemes with a total budget of €20bn have been approved by The European Commission. The aim of the schemes is to reduce the risks involved in issuing operating loans to businesses that have been severely affected by the COVID-19 outbreak. The schemes will provide much-needed liquidity for the companies so that they can continue their activities and retain their employees. The state is limited to taking a risk of a maximum of 80% for self-employed and SMEs and 70% for larger enterprises.
European Commission has also approved French schemes. The French government is set to mobilise €300bn of liquidity support for businesses in need in the current situation. Schemes also allow the French public investment bank Bpifrance to provide State guarantees on commercial loans and credit lines for companies with up to 5,000 employees. European Commission has limited the risk taken by the French government to a maximum of 90%.
US Small Business Administration (SBA) has released four temporary funding programs which were established under the CARES Act. Those four programs are:
- Paycheck Protection Program
- EIDL Loan Advance
- SBA Express Bridge Loans
- SBA Debt Relief.
The actions depending on the programme include loan forgiveness for retaining employees, loan up to $10,000 for businesses affected by the coronavirus and debt relief for small businesses.
Although the current economic situation is far from good there are some positive signs already. The number of jobs added to the US market was higher than expected by the estimates of the US Labor Department. The CBILS in the UK and other relief packages around the world will allow businesses to stay on float and help lead the world to a faster economic recovery.