Monday 27 July 2020 10:07 am

CBILS: Three ways SMEs can avoid a coronavirus loan rejection

Save our SMEs

It has been nearly four months since the Treasury introduced the Coronavirus Business Interruption Loan Scheme (CBILS) in a bid to help firms through the pandemic. 

The scheme did not arrive without criticisms, coming under fire for what its critics called its unclear eligibility criteria and demanding personal guarantees.

While some issues have since been ironed out, the application process still poses issues for many SMEs.

Read more: Nearly all SME lending is through emergency coronavirus funding

While banks have lent £12.2bn to 55,674 small and medium businesses, 112,212 SMEs have applied in total, meaning 50.4 per cent have seen their applications rejected.

So with under half of applications for CBILS approved, City A.M. spoke to Crowe, a firm that claims a 100 per cent approval rate for its clients’ applications, about how best to approach the process.

1. Avoid errors on your CBILS form

“Delays due to errors in application can be the difference between business survival and jobs being kept or lost,” says Dave Riley, corporate finance partner at accounting and consultancy firm Crowe. 

And there will likely be another wave of CBILS applications as companies come to realise the extent of the economic impact of coronavirus. Fears of a second wave as well as the unwinding of the furlough scheme is likely to push many companies towards the CBILS scheme. 

Johnathan Dudley, partner and head of manufacturing at Crowe told City A.M.: “I think there will be a rush in August and September for businesses which suddenly realise they need CBILS. A lot of businesses did not make an application for any loans because they thought they could stabilise their businesses.”

Additionally, changes to EU state aid rules will open the scheme up to firms previously deemed to be “undertakings in difficulty”. That could lead to a sharp increase in applications as previously rejected firms try again.

This means it is crucial for SMEs to get their applications right before the CBILS scheme closes in September.

Read more: Exclusive: MPs ask banks for clarity on state aid rules and coronavirus loans

2. Predict your profitability

Under CBILS criteria, lenders shouldn’t “look forward” on a firm’s prospects – predicting future earnings. But Dudley tells City A.M. that banks find it hard to “depart from traditional banking principles and many applicants just ignore this”.

Aside from demonstrating strong and up to date financials, Crowe has found that despite the rules, financial forecasting is essential in CBILS applications.

The firm found that the absence of analysis of how historic financial performance will serve debt in the future usually results in applications being rejected at an early stage.

While seemingly obvious, a number of firms are failing to include balance sheets and future profit and loss estimates based on current cashflow.

Additionally, a CBILS application “should include a summary of the adverse effects of Covid-19 on the business; what has been done already… and what the expected future challenges are,” Dudley tells City A.M.

Anecdotally, in trickier cases, the lenders are often going back to the firm to ask for forecasts for different scenarios.

“If [a firm] can go back to the bank promptly it’s demonstrating you’re on top of your numbers and you’re scenario planning effectively,” says Dudley.

“The overall objective should be to make the lender’s job easy for them, so anticipating questions before they are asked and an explanation of why the business was successful pre COVID-19, and a realistic explanation and timeframe of how and when it will be after COVID, is very advisable,” he adds.

Read more: Treasury welcomes change in state aid rules for government-backed loans

3. Explain how your SME will operate in the ‘new normal’

An essential element of scenario planning is to explain how the business will move forward in the so-called new normal.

Social distancing restrictions have changed the year’s outlook for the vast majority of firms – whether they are listed entities or SMEs.

The uncertainty over reopening and a severe drop in footfall have hit the retail and hospitality sectors in particular.

Compounding this is the prospect of a second wave and subsequent lockdown, which could leave firms even worse off.

“This uncertainty has to be scenario modelled, effects predicted and mitigation actions incorporated,” says Dudley.

“Surely an extension of the September deadline or reinstatement will be required, even on a postcode basis, should this occur,” he posits.