Warning! Iceberg dead ahead - and its called forbearance!

We will never know how different the outcome would have been if the iceberg had been spotted earlier or if a different course of action had been taken. Some suggest that hitting it head-on rather than trying to turn and taking a glancing blow would have left the ship severely damaged but still afloat. Who knows?

What’s the link with directors in the Midlands? Well, there is a warning of ice in the near future and wise business owners/ managers should be looking out for it, as it could have serious consequences.

Government-backed Coronavirus Business Interruption Loans (CBILs) were granted with a six-year term. In September last year, when it was clear that the pandemic was not going away anytime soon, it was announced that loans could be extended beyond the original term to reduce the burden on businesses.

For smaller businesses this appears to be pretty much a flexible option and lenders will be getting in touch with customers just before repayments are due to start with a range of flexible options.

For the larger CBILs, however, the position is far less straightforward. The British Business Bank website says:

‘A term extension beyond 6 years, up to a maximum of 10 years for existing CBILS facilities, can be made in connection with the provision of forbearance relating to the facility, at the discretion of the lender if within its usual forbearance policies.’

So where, you may be asking, is the iceberg lurking in that statement?

It’s in the word ‘forbearance’.

The customer has to ask the bank for forbearance and has to prove need. In effect, the client has to tell the bank that they are very likely to default on the loan if the term is not extended.

I understand from at least two lenders that forbearance and therefore extension of the term cannot be handled by account managers; it will only be available from the experts in ‘Special Measures’, in other words, the ‘bad bank.’

This means customers will be looked after by the teams that specialise in getting the bank’s money back. At the very least it means providing lots of data to the bank on performance of your business every month and at worst, that they will start recovery processes.

CBILs had no personal guarantees below £250k and were restricted to 20 per cent above £250k and supporting security over your home was not allowed. But that is not the full picture either – another potential iceberg looms.

What if the bank had pre-existing security – guarantees and charges over your property? These will almost certainly be ‘all monies’ securities which means they can be applied to any and all money owed to the bank. Will the bank manage the recovery in such a way as to maximise what they can claim? Yes, they almost certainly will.

The Government 80 per cent guarantee is 80 per cent of what is left after the bank has recovered everything it can from the company / security – it is not, and never was, 80 per cent of the loan.

You may have the right to request an extension to your CBILs but I would strongly suggest that you need to think it through very carefully before you do.

So perhaps a different course of action is called for?

The Government has launched 80 per cent guaranteed Recovery Loans. On the face of it these are very similar to CBILs but do have some differences. There is no 12 month repayment holiday and no interest-free period – the client must also pay the arrangement fees. The loans can be from £25,001 to £10m and can be in addition to your CBILS and or Bounce Back loans. The rules around guarantees and security are the same as CBILs.

The banks will be doing a detailed underwriting exercise on applications along with all the expected ID and fraud assessments. Banks underwriting is geared towards minimising the risk of loss to the bank; security, including the Government guarantee, is and always should be a secondary consideration. Banks are not pawn brokers, they lend to businesses that can afford to repay, not just against the security.

So, if you have a good business, one that has the potential to grow and recover from the impact of Covid, a recovery loan could be for you and help you manage your future cash flow.

You will need a strong business case and a good set of forecasts that not only demonstrate that you will be able to service all of the borrowings (existing and new) and that the serviceability is evidenced even when the forecast is subjected to stress tests (drop in turnover / increase in costs / being lockdowned again…)

The main banks are not the only lenders – more lenders are being approved all the time so take a wider view of the potential lenders to support you.

Please be on the lookout for icebergs and take advice in good time; dealing with lenders is not always easy or straight forward and having professional support will help your case.

IoD Black Country Chair

Ian Priest