In the immediate aftermath of the Covid-19 lockdown measures, the Coronavirus Business Interruption Loan Scheme has proved a valuable source of funding for cash-strapped businesses and, in many cases, has been instrumental in their survival.
These loans (CBILS, as they have become known) are attractive for a number of reasons, including the government covering the first 12 months’ interest and charges through a Business Interruption Payment, and no personal guarantees being required for loan facilities of less than £250,000. However, although the lender is provided with a Government-backed guarantee for a CBILS loan, the borrower remains 100% liable for the debt, which will ultimately need to be repaid.
As lockdown measures are eased, businesses are typically moving from ‘survival’ mode into ‘stabilisation’ mode – including forecasting their turnover and expenditure in a changed marketplace and putting together revised business plans to take account of this. A key part of this assessment will, of course, involve considering the cash and credit requirements of the business.
Given that, for CBILS loans which have already been made, the borrower will need to start paying interest in less than 12 months’ time, business owners will inevitably need to look at the long-term viability of the emergency funding currently in place and consider what other options may be available to them. For most, the main alternatives will be:
• Investment by the current owners of the business
To the extent that the current owners of a business have personal resources available to them, they may decide that this is the most straightforward funding route. Funds can be introduced by way of debt or equity investment, with significant flexibility as to the terms.
For debt funding, it is highly advisable to put a formal loan agreement in place and to consider whether the lender should take security over the company’s assets. For equity funding, the impact of any change in shareholdings on the overall control of the company should be considered, with appropriate changes being made to shareholder agreements and articles of association as required.
• Mainstream commercial borrowing
The current commercial lending market is competitive and the range of products available is evolving all the time. It will therefore be sensible for borrowers to look at the alternatives which are available to them when the 12 month ‘interest free’ period for the CBILS comes to an end, and consider whether it might be advantageous to refinance the CBILS loans (whether in isolation or as part of a wider refinance of the business). As always, the key to this is planning well ahead in order to ensure that there is ample time to meet funders’ commercial and legal requirements.
• Third party equity investment
It has been well documented over recent years that there is a large amount of private equity money available for investment, and the same is also true for ‘business angels’. The current historically low rates of interest paid on savings seem unlikely to rise significantly in the near future, so these opportunities look set to remain. For businesses seeking funding, the commercial terms of the investment (including the need to give warranty and indemnity protection in an investment agreement, and also the degree of control over the business that investors will expect) will obviously be a key focus. However, it is also vital to consider what an investor is able to add to the company in terms of management experience. Bringing new personalities into an established business brings obvious challenges and finding the right ‘fit’ will be vital to the success.
It should, of course, be borne in mind that these funding routes are not mutually exclusive and, in many cases, a blended approach may be the most appropriate route.
BHW’s Corporate and Commercial Team has extensive experience of advising clients on secured and unsecured borrowing, equity investment and shareholder arrangements. We also work closely with an extensive network of local banks, accountants and corporate finance advisers to ensure that our clients receive joined-up advice which is tailored to their specific needs.