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CBILS funding - from survival to growth

10th Aug 2020   ·   The ThinCats Team   ·   Insights

Since the Coronavirus Business Interruption Scheme (CBILS) launched in March, it has been through several iterations as other government schemes such as Bounce Back Loans (BBLS) and the Coronavirus Large Business Interruption Scheme (CLBILS) have been added to the Government’s Covid-19 business support toolkit.

During this time the eligibility rules for CBILS have also widened to include more businesses – most recently on 31 July following changes to EU rules on state aid.

When launched, the immediate aim of CBILS was to prevent a repeat of the liquidity squeeze seen during the 2008 financial crisis when a lack of funding forced many businesses to cease trading – literally grinding to a halt due to lack of cash. When combined with other government initiatives such as tax deferrals, business rates holidays, cash grants and the job retention scheme, the Government hoped that the 80% guarantee built into CBILS would give banks and other lenders the confidence to fund businesses despite the negative impact of Covid-19 on borrowers’ revenues.

From our perspective as a CBILS lender to existing borrowers since June, and to new borrowers since July, we have provided emergency funding to businesses to help them bridge the gap to a time when trading could continue. In this respect CBILS loans have been very successful in facilitating more than £13 billion in funding so far.

However, for many of the medium-sized businesses that we focus on, recent conversations with new borrowers are less about short-term cashflow for survival and more about funding to facilitate growth. This may be to support organic growth or to fund acquisitions at more attractive valuations than were available pre-Covid. It’s worth remembering that acquisitions also support the survivability of both target and acquirer bringing wider economic benefits.

Many businesses have responded to the challenges of the pandemic by pivoting their business models with new product or service offerings, which they now want to entrench through strategic funding.

We typically provide CBILS funding to support organic growth via working capital, refinancing to top-up and/or free up working capital and through growth capital. A common misconception is that private equity backed businesses are not eligible for CBILS funding, however, other than for some high growth businesses that have accumulated losses higher than the value of their share capital, CBILS can be an accessible source of funding for PE backed businesses. As a further incentive, the “accumulated losses” rule does not apply to businesses less than three years old or ones that have less than 50 employees and annual turnover less than £9 million.

In the case of funding for acquisitions, CBILS can be used for most acquisitions other than for management buyouts or buy ins. For private equity investors, their existing portfolio businesses can use CBILS to fund bolt on acquisitions, however, PE investors cannot use CBILS to add new businesses to their investment portfolios. One of the features of CBILS which can be helpful for funding acquisitions is that the Government pays the first 12 months interest payments and any lender levied fees including due diligence and legal costs. This provides the breathing space for businesses to focus their cashflows on growth benefitting the wider UK economy.

Mid-sized businesses are generally more financially resilient than smaller businesses. As such, many of the businesses that we are now talking to about CBILS funding have weathered the initial impact of the covid pandemic in reasonably good shape and are looking to make sure they are well-positioned to make the most of opportunities as the UK economy recovers.

Clearly, further lockdowns or social distancing restrictions cannot be ruled out, impacting some sectors more severely than others, however, the trend that we are seeing for using CBILS for growth purposes rather than pure business survival is encouraging. The Government should also be encouraged as it is growing businesses that will provide the new jobs needed to make up for the hundreds of thousands lost as a result of the pandemic. It will, nevertheless, take time for many businesses to establish their requirements for strategic growth funding and their decision-making process will be heavily influenced by the course of the pandemic over the autumn and winter months.

This is why we are encouraging the Government to give these businesses more time, by extending the current deadline for CBILS from the end of September until Spring 2021.

Without an extension and the accompanying partial guarantee provided by the Government, there is a real risk that critical strategic funding for growth – which could also deliver valuable productivity gains – will dry up leading to a repeat of the liquidity squeeze that CBILS were designed to avoid.

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