The application deadline for the Coronavirus Business Interruption Loan Scheme (CBILS) has been extended to 30 November 2020 and some subtle changes have been made to the Undertaking in Difficulty test. Alternative lenders, such as peer-to-peer (P2P) lending platforms or challenger banks, that are authorised to offer CBILS loans, will be seeing a surge of new applications and they should take extra care to ensure new borrowers are fully compliant with the British Business Bank’s (BBB) loan eligibility requirements. Christopher McLean explains this is to be certain that the government guarantee would be valid should it ever need to be called upon.
Our experience has shown us that lenders are taking different approaches towards CBILS eligibility criteria.
Traditional lenders, such as high street banks, are probably taking a more prudent interpretation, while alternative lenders, like challenger banks or P2P platforms, can have a slightly wider interpretation as to who is eligible for the scheme and who is not.
CBILS-approved lenders in the P2P and alternative lender space should take extra care when assessing new borrowers, as their investors could wind up bearing the cost of any defaults.
When repayments come due, there may be defaults and recovery shortfalls, at which point the guarantees may need to be called upon. At that time, it is likely that lenders will be asked to demonstrate that such loans advanced to borrowers were fully compliant with all the criteria at the outset.
If they were not, the guarantee may not be valid and the lender will bear the losses.
Change to eligibility requirements
The BBB has indicated some flexibility around the date on which the Undertaking in Difficulty test is measured. Businesses that were Undertaking in Difficulty on 31 December 2019 but are no longer ‘undertakings in difficulty’ may now be (in principle) eligible for the CBILS scheme.
The BBB has stated that if, for example, there was a major equity injection after 31 December 2019 but prior to the date of application, interim or management accounts may be used. This would normally be accompanied by an auditor’s or accountant’s letter verifying the situation.
This increased flexibility means businesses can take action to convert their debt to equity and/or to recognise the benefit of any equity injections, in order to pass the Undertaking in Difficulty test en-route to becoming eligible for the CBILS scheme.
Thorough due diligence
Lenders will be seeing a wave of new applications as the CBILS closing date approaches - possibly from borrowers who have already been rejected elsewhere - so thorough due diligence is essential. It is important that lenders fully understand the new Undertaking in Difficulty rules to ensure that applicants comply, and that they understand the full effect of any restructuring the applicant may have undertaken.
Lenders should also be aware of a predicted spike in unemployment as the government furlough scheme comes to an end and the new job support scheme measures may not help everybody. Many businesses are forecasting further liquidity pressures towards the end of the year, and some will have a liquidity gap. Applicants also need to be able to demonstrate and be prepared to self-certify that they have been impacted by COVID-19, and that they have a good prospect of being able to trade out of these difficulties with funding support. It is important to really test the borrower's ability to meet those criteria.
Communicate with the British Business Bank
Lenders need to make sure that they are applying the borrower eligibility criteria in accordance with the British Business Bank guidance. If there is any doubt about a particular borrower or the criteria in general, platforms should seek advice or communicate directly with the bank.
This added due diligence is likely to require more time and resources, but this is not necessarily a bad thing. Amid tightening regulations and an uncertain economy, alternative lenders such as peer-to-peer lending platforms and challenger banks, will be under additional pressure to demonstrate that they have what it takes to compete with traditional lenders at every level.