124. How are you fixed for when CBILS and BBLs start biting back?

More than 1.4 million businesses¹ in the UK have taken advantage of the government-guaranteed loans (worth over £62 billion) to support their cashflows during the coronavirus crisis. This is effectively “free money” for a 12 month period.

In addition, many have used the C-19 Job Retention Scheme to ensure the very survival of their business and to minimise the financial effects on their staff. And this was to continue in a less generous form under the new Job Support Scheme from 1st November 2020.

Stop Press: Due to L2.0, the Job Retention Scheme has been extended to 31st March 2021 currently at the levels it was in August (i.e. before tapering).

And there are some that have taken out these loans, quite simply, because they could.

But now we are looking down the twin barrels of a long hard winter (clinically speaking) – and some long hard lockdown measures, now confirmed with Lockdown 2.0 effective 5th November.

Tectona predict that these (coupled with Brexit and US elections) will result in a large number of businesses not being in a good place next spring – particularly in terms of cash.

And their ability to borrow more money is going to be questionable given that they are maxed out on the “affordability” criteria and because their gearing is shot to bits.

Unfortunately, next Spring is precisely when all this “free money” will start biting back.

¹As at 22nd October:

£40.2bn/1,336,320 businesses – Bounce Back Loan Scheme (BBLs)

£17.2bn/73,094 businesses – Coronavirus Business Interruption Loan Scheme

£4.6bn/623 businesses – Coronavirus Larger Business Interruption Loan Scheme

£771m/745 businesses – Future Fund

Source: British Business Bank

Because (as currently structured) from month 13 of government backed loans (CBILS and BBLs), the borrower will need to be paying both:

  • The interest costs; and

  • Loan repayments.

Add to these potentially large regular cash outgoings a dose of likely well below normal trading (and therefore weaker than normal cashflow) and we start getting very concerned that this will push a number of businesses over the edge and in to the arms of insolvency practitioners.

Future Support – The UK government needs to decide just how far it will go and what it is prepared to do to help. And we suggest it needs to give some clarity pretty soon so that we can all plan ahead.

At Tectona we talk to many businesses and professionals and wanted to share some of their thoughts and what they see as the options available to the government and to the lenders. These are the things that we hear being discussed (although we should stress that, at this stage, nothing has been finalised):

  • Do nothing – the easy and potentially very damaging option.  Clearly, clients that monitor cash and assess outgoings in line with potential lower levels or revenue will be better placed than those that have not.

  • Soften the blow:

    • by extending the interest and loan repayment “holiday” (currently the first 12 months of the loan)

    • by extending the loan period (currently a maximum of 6 years in total) to 10 years. This will have the effect of reducing the monthly repayments but businesses paying more interest in total over the term of the loan. (Caution: for some reason State Aid is cited as an issue – given this is a European construct, one wonders why we will still be constrained by this in 2021 and beyond)

    • by offering 6 month interest only options (up to 3 times)

  • Getting creative (and dramatic, and costly)

    • Writing off proportions of the loans

    • Repay As You Grow (which has been mooted by the Chancellor); lump sums could be repaid without penalty and apparently would have no impact on credit ratings.  We assume  that this will look something the UK Student Loan Scheme?

There is no hiding from this. And we make no bones about it – it is a really tough balancing act. The government clearly needs to focus support on those businesses that have a reasonable chance of emerging from all this intact, and not on those (let’s call them the walking dead) who don’t have the strength of management, the financial robustness or the flexibility of proposition to ride any more shocks.

There is so much uncertainty around that we believe decisions will only be made when these same loans start biting back.

And given that many sources estimate that somewhere between 15% and a staggering and jaw dropping 80% of BBLs will default running into many billions having to be written off, this will mean that the government will have few options to be generous.

Have you heard talk of any other ideas? We would love you to share them with us.

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