Managing CBILS and BBLS: navigating flexibility and trade-offs between the schemes

Small and medium-sized enterprises (SMEs) have a succession of financial challenges to absorb in the post-Covid environment. Many SMEs and micro-businesses are now encumbered by higher balance sheet debt than prior to the pandemic in a higher-for-longer interest rate environment with persistent inflationary pressures and a weakening economy. 

Companies contemplating a refinance or extension of their government-backed Covid-era loans, which were designed to provide financial support to businesses affected by pandemic disruptions, have several options to consider. In this article, we review the status of Covid-era loan schemes and the main considerations for SMEs when reviewing their refinancing options.

Covid loan schemes: relatively smooth progress

Overall, £80.37bn worth of loans were approved across the three main government-backed financial loan schemes in approximately 1.67 million loans – equivalent to around 28% of all UK businesses receiving a loan – according to data published by the Department for Business, Energy & Industrial Strategy. Of this total, UK businesses drew down £77bn as at 31 March 2023. This comprised £46.6bn through the Bounce Back Loan Scheme (BBLS), £25.9bn through the Coronavirus Business Interruption Loan Scheme (CBILS) and £4.56bn through the Coronavirus Larger Business Interruption Loan Scheme (CLBILS). BBLS thus represented 93% of all government-backed loans approved and 59% of the total amount loaned. 

UK businesses have fully repaid £15.9bn (around 20%) of all drawn facilities, with a further £34.5bn (approximately 45% of total drawn loans) making payments on schedule; Covid-era loans in arrears and default are £2.6bn and £1bn respectively. Banks have so far utilised government guarantees on £6.2bn, with another £1.2bn pending. In addition, around £1.2bn of loans are suspected of fraud – far lower than many reported figures have suggested. Taken together, around £8.6bn worth of Covid-era loans are currently not expected to be repaid – representing around 11% of total drawn facilities. 

However, the government published data does not take account of events which can reduce outstanding balances (e.g., partial loan repayments, recoveries as well as loan amounts written-off by lenders).

Across the three main schemes, more than 93% of CBILS facilities are either fully repaid or on schedule, while the equivalent figures for BBLS and CLBILS are above 77% and 98%, respectively. All loan schemes are closed for new applications, but extensions under existing facilities may still be possible. These loan schemes offered favourable terms and government guarantees to help businesses weather the storm. However, it is essential to note that these loans have distinct characteristics and implications for borrowers considering refinancing or restructuring. 

Understanding loan scheme options

The underwriting process for CBILS and BBLS varied. In many cases CBILS facilities underwent a comprehensive underwriting process with banks applying standard credit criteria to assess loan eligibility. However, some CBILS were extended with collateral security over and above the government guarantee. The Banks when reviewing CBILS facilities in particular treat the loans the same as their own normal bank lending under a duty of care to the British Business Bank.  

A critical aspect of loans under the CBILS and BBLS is that they cannot be transferred between banks. If a borrower wishes to seek additional financing from a different bank due to a denial for an extension or refinance by their current lender, the existing loan can only be repaid. Refinancing converts the facility to a traditional loan that will not benefit from a government guarantee. In most cases, borrowers will be better off retaining their existing CBILS and BBLS facilities as they will benefit from lower interest rates than new loans today; however, there are exceptions to this trend. 

BTG Advisory has seen a number of cases where existing security held by the bank was used to secure CBILS loans, preventing borrowers from utilising these assets to raise further finance. This tied-up collateral can hinder the efficient use of company assets as loan collateral, which may cause some affected borrowers to consider early refinancing. However, there is a clear trade-off as these loans benefit from attractive terms (e.g. low interest rates, six-year maturity with an option to access the ‘Pay As You Grow’ scheme) which would be sacrificed in a refinance or restructuring. 

In some cases, sacrificing the advantages of the CBILS facilities may be worth the benefits to SMEs by consolidating borrowings, which would allow restructured terms, an extended repayment schedule and more efficient use of company assets as collateral. However, this is not always a simple choice and SMEs are advised to seek independent advice in these circumstances. 

In contrast, BBLS are smaller loans (of between £2,000 and £50,000) with term loan repayment periods of up to six years, including a year without repayments. For most businesses, these loans will run off naturally without posing a significant burden. The interest rates offered under BBLS were highly attractive, relative to today’s pricing. For SMEs wanting to maximise the benefits of existing facilities under the BBLS, the subsequent higher interest rate environment has made the ‘Pay As You Grow’ scheme even more attractive. The scheme allows loans to be extended from six to ten years, at a fixed interest rate of 2.5%.

BTG Advisory is well placed to assist SMEs with the best course of action. When contemplating the best long-term financing options, it may be appropriate for SMEs to look beyond traditional banking relationships. Alternative lenders can provide faster execution, funding flexibility and repayment options bespoke to specific company requirements; however, borrowing costs from alternative lenders may be higher. 

Some businesses emerged from the pandemic not only burdened by CBILS loan repayments, but also with arrears owed to HM Revenue and Customs (HMRC). Negotiating a ‘time to pay’ arrangement with HMRC can alleviate this burden, but borrowers must adhere to the agreed commitments. Defaulting on such arrangements may result in HMRC pursuing winding-up petitions. HMRC renegotiations are possible for those SMEs, but clear communication and evidence of circumstances are paramount. If you would like to discuss your company’s circumstances in confidence, please do not hesitate to get in touch with one of our team today.