CBILS and BBLS loans for businesses

Can a Business in Difficulty”​ qualify for a loan under CBILS (Coronavirus Business Interruption Loan Scheme) and BBLS (Bounce Back Loan Scheme)?

Both the Coronavirus Business Interruption Loan Scheme (“CBILS“) and the Bounce Back Loan Scheme (“BBLS“) contain restrictions on the eligibility of businesses to qualify for loans where they were a “business in difficulty” as at 31 December 2019. Many clients have asked what this means and whether it applies to them.

What is a “business in difficulty”?

A “business in difficulty” under both CBILS and BBLS is one that, as at 31 December 2019:

(i) had accumulated losses in its last annual accounts of more than half of its subscribed share capital for limited companies, or for partnerships, limited partnerships and unlimited companies, half of its capital; or

(ii) had started, or had fulfilled the criteria to be put into, winding up, a CVL, administration, bankruptcy or other insolvency procedures but NOT including receiverships, members’ voluntary liquidations and schemes of arrangement under Part 26 of the Companies Act 2006; or

(iii) had previously received rescue aid that was yet to be reimbursed (or, in the case of a guarantee, terminated); or

(iv) had received restructuring aid, and was still under a restructuring plan; or

(v) (for a business with 250 or more employees only), for the two years prior to 31 December 2019, the book debt to equity ratio was greater than 7.5; and its EBITDA interest coverage ratio was below 1.0. A business must meet both to be classed as “in difficulty”.

Businesses less than 3 years old

The CBILS and BBLS definition of a “business in difficulty” includes businesses that have accumulated losses that are greater than half of their subscribed share capital, as at 31 December 2019. For a limited company, this means having accumulated losses greater than half of its share capital, if deducting accumulated losses from the company’s reserves leads to a negative amount that exceeds half of the company’s subscribed share capital. The calculation of share capital includes both the nominal value and premium paid on shares.

These criteria do not apply to businesses with less than 250 employees that, on 31 December 2019, had existed for less than three years.

Eligibility for CBILS

A “business in difficulty” is not eligible under the CBILS unless it is borrowing less than £30,000.

A startup that is less than 3 years old will not be constituted a business in difficulty simply because it breaches the accumulated losses condition and so may well qualify for CBILS even if it is significantly loss-making.

However, businesses have to demonstrate a coherent business plan and route to profitability and demonstrate that they will be able to repay the loan in order pass the lender assessment, meaning that many younger high growth startups still won’t be able to secure a loan.

Eligibility for the Bounce Back Loan Scheme

A “business in difficulty” may be eligible under the BBLS.

A business has to self-declare if it is a “business in difficulty” but will remain eligible under BBLS if it would not have received more than £177,800 in de minimis State Aid including the Bounce Back Loan and the 2.5% contribution made by the government in respect of the interest payable to the lender for the first 12 months of the loan term.

De minimis State Aid includes SEIS and R&D tax reliefs, but not EIS or VCT tax reliefs (which are approved State Aid). Applicants for the schemes are subject to an aggregate limit for all State Aid of £711,200 since 19 March 2019, with lesser limits for fisheries and agriculture businesses.

What does this mean for startups?

CBILS loans are subject to detailed reviews by the lending banks to ensure that the borrower meets affordability and solvency tests. Loans under BBLS are not such subject to such detailed reviews and borrowers self-certify that they comply with the rules.

Many startups have struggled to qualify for CBILS loans, either because they are high growth loss-making startups older than 3 years (and so fail the accumulated losses test) or they are less than three years old but unable to demonstrate a route to profitability that would meet affordability tests for the loan.

Startups under 3 years should qualify under BBLS, but those older than 3 years who fail the accumulated losses test may exceed the State Aid requirement.

For startups with VC backing, the Future Fund may be an option (so long as they can find matched funding); for startups reliant on angel investment and 3 years or older, there are no immediate sources of relief.

Further information

For further information on the CBILS and BBLS, please see the British Business Bank’s dedicated webpage.

For information on other available sources of funding, please see our blog here.