What happens if my Company Can’t Repay its CBILS loan?
Did your business take advantage of a Coronavirus Business Interruption Loan (CBILS) Source. BRITISH BUSINESS BANK “CBILS” ? This government-backed loan scheme provided a welcome funding stream and safety net for the SME sector needing finance during the worst of the pandemic, and when many firms were experiencing severe disruption.
The CBILS lending programme of financial support as – it is now closed to new applications – is available to firms that had a turnover of less than £45 million a loan term from two to six years.
The aim was for the scheme to provide finance promptly and many businesses may have found a CBILS loan was available at more competitive interest rates and was easier to obtain in terms of its acceptance criteria, than other loan facilities. The government put in place an 80% guarantee for lenders which significantly reduced their risk of losses.
But now the economy has reopened, and if it is a year since your company took out the loan, then the bank or lender will likely be demanding monthly repayments or the CBILS loan. So, what should you do if trading has not picked up, you cannot obtain finance and your business continues to experience financial difficulties or perhaps is already experiencing insolvency.
Check the Terms and Conditions of Your CBILS Loan
It’s possible, given the pressures of the pandemic, that a director may have accepted finance from a bank or other lender as a lifeline, without being fully aware of all the details. A CBILS loan had some variation – there could be different payment terms for the loan and some lenders may be more willing to offer a repayment holiday to a business than others. It was stated that for a CBILS loan there would be no personal guarantee permitted for facilities under £250,000 –  Source. BRITISH BUSINESS BANK “How CBILS Works” . However, it is possible that a bank or lender may have lent under another arrangement or scheme- check what your monthly repayments are when they are due, and if any personal guarantee was given. Directors should be fully aware of their obligations before they seek advice or any negotiations with the lender.
Do you Need More Time to Repay Your CBILS Loan?
Cash flow problems for a business can be temporary. You may have plenty of income coming in, but it is further down the line. Perhaps your business has been affected by staff shortages or absences or supply chain issues – but these are now less severe and directors want to continue trading and in the coming months, pay their CBILS loan via the agreed monthly repayments.
If you have evidence that finance will improve, then the lender may well respond favourably to requests for assistance, which could be a payment holiday, an extended loan term, or an interest-free period. If a business is viable, it is in no one’s interest to press for insolvent liquidation if recovery is possible. If directors are confident that their current struggles will be overcome in the coming months, then they should contact the lender without delay to explain the situation. With a CBILS facility, lenders will look at circumstances on a case-by-case basis, which is why you should ensure you have evidence of future cash flow, how you should be able to manage monthly repayments, and the company’s financial health.
Would Additional Finance Ease the Situation?
If your company was already pressurised in terms of its finance, you may find that a further loan or overdraft is not an option. However, even if you do not qualify for a business loan from a lender, you may find that invoice financing – if you have enough business coming through – may be able to provide some respite and allow you to make the necessary repayment for the CBILS loan. There may be other financial support out there and directors should be prepared to request guidance on how best to manage their situation.
What Happens with CBILS if my Company is Liquidated?
If your business is trading, then the CBILS needs to be repaid – even if some breathing space can be achieved through an agreement with the lender. However, if the business is insolvent, then liquidation may be the only way forward. In this case, it should be remembered that a CBILS is an unsecured loan. The bank or lender is therefore an unsecured creditor and will be below secured and preferential creditors in terms of priority of payment in a liquidation.
Business assets are sold off during a liquidation, but unsecured creditors often receive nothing and so the CBILS loan and other unsecured debt are written off.
Can I be Personally Liable for a CBILS?
We have a separate article for directors and the personal guarantee here. But, briefly, this would only be an issue for a company that took out loans of over £250,000 and was requested to take out a personal guarantee. The personal guarantee will be subject to conditions with only 20% of the debt being liable from the company director and their main home cannot be used as security.
Don’t Delay in Seeking Advice
Having an outstanding CBILS loan debt – and indeed all types of due payments – can put directors under a great deal of stress. This is why you should request advice from an objective and independent professional. Dealing with debt is a serious undertaking and a licensed insolvency practitioner will have in-depth knowledge of CBILS loan schemes and the particular needs of the SME and larger concerns. They can help directors decide what the best course of action should be whether they are already facing insolvency or not. This could include restructuring, understanding the value of business assets, and other forms of financial support.
An insolvency practitioner can provide expert advice on liquidation, but also business rescue options, such as a Company Voluntary Arrangement, where extended and often reduced settlement terms are agreed with creditors and the business continues trading. Meanwhile, the administration process will attempt to find a buyer for the business or another route forward. In both these instances, your CBILS lender will be kept informed of your position and will be subject to restrictions in terms of chasing the debt as with other creditors.
A compulsory winding up should be avoided if at all possible because this can be more damaging in terms of affecting directors’ status, their ability to obtain further loans, and their credit score – and a default will be listed on the credit file, as well as meaning they may be subject for investigation for wrongful trading and even fraud.
You should seek help from a professional on how to manage your company’s particular situation. Directors can seek information and investigate their options – this will include how they should inform and manage employees, redundancy, and state aid eligibility. Overall, directors will have more control of the insolvency process, which will place them in a stronger position for any future business venture.
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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