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The Coronavirus Business Interruption Loan Scheme – what happens in the event of default

5 April 2020: the Coronavirus Business Interruption Loan Scheme (CBILS) provides support for businesses to access funding if certain eligibility criteria are met. Here is a worked example of what happens in the event of default.

OFFICIAL GUIDANCE: 

What is CBILS?

CBILS has been introduced by the UK Government as a temporary measure with the aim of supporting the continued provision of finance to UK SMEs during the COVID-19 outbreak. The scheme is designed to provide lenders with a government-backed guarantee.

CBILS is administered by the British Business Bank and made available to businesses via more than 40 accredited lenders, including the major high street banks. Businesses should apply via their existing bank or a lender accredited via the scheme.

What happens in the event of default under the revised CBILS rules?

From 6 April 2020 new rules apply around Personal Guarantees for CBILS.

A worked example shows how the revised rules for CBILS would work in practice:

  • A business takes out a £1,000,000 facility under CBILS
  • It pays off £400,000, then, unfortunately, defaults owing the lender £600,000
  • The lender recovers £100,000 by realising and receiving payment from the disposal of business assets offered as security against the loan, such as a debenture (e.g. stock). This leaves £500, 000 of the original advance still outstanding
  • The lenders call on Personal Guarantee is now limited to 20%, ie £100,000 (Not 100% i.e. the full £500,000 as previously), leaving £400,000 as a loss
  • In these circumstances the Government then takes a loss of £320,000, and the lender loses £80,000

CBILS facilities offered before 6 April 2020

For any CBILS facilities offered prior to the change in terms, lenders are expected to apply the new requirements around the taking of Personal Guarantees.

Therefore, in instances where a Personal Guarantee has been taken for a CBILS facility below £250,000, the lender cannot make any demand on it or apply any proceeds from it in connection with the CBILS facility.

Additional information