This rush for CBILS lending could have serious ramifications for business in the future and businesses should consider other sources of finance to plug immediate funding gaps.
Interest rates for CBILS loans are often more expensive than conventional lending but with this cost and capital repayments deferred for 12 months many business owners have not considered the full impact of the loans they have taken out and the impact on cashflow in the future.
Existing borrowings could consume so much of the free cashflows generated that additional borrowing is simply not possible. Any decision to move banks will require the current CBILS lending to be refinanced, which may well prove difficult when banks are required to submit a fully supported credit application as opposed to relying upon an historical assessment of affordability as permitted under the CBILS.
One of the limiting factors for CBILS lending is that the maximum term for a loan is six years. As businesses reassess their business models and consider the future, it may well be more appropriate for them to access funding spread over the longer-term to invest in their business and also fund any structural deficit in their finance caused by the pandemic.
Many small and medium-sized enterprises have accessed this funding to keep their businesses alive and, following a slow start, CBILS loans are now the lending choice of first resort. Businesses have used this funding to plug gaps in their cashflow that would have resulted in a permanent deficiency in their cash, paying expenses during a period of reduced or non-existent revenue. Whilst the Coronavirus Job Retention Scheme covered a proportion of wage costs, there were still other expenses for businesses to pay in order for the UK economy not to grind to a complete halt and it was right for businesses to pay what they could.
The basket of measures introduced by the Government has allowed many businesses to survive in a hibernation state and one of the key factors has been the access to funding available through Bounce Back loans and the CBILS. The ability to access funding with no capital or interest repayments for 12 months was simply too good an opportunity to miss. But as the lockdown eases and business owners look to the future and plan for the months ahead, they need to be extremely careful about rushing into short-term arrangements.
Due to the pandemic, business models are changing, and it seems likely that banks will make decisions about lending to businesses based purely on the sector they operate in. Businesses will need the freedom to move banks and consider the full suite of funding options available to them.
For those businesses that can, is it not wiser to look to other sources of finance to plug the immediate gaps in funding and then, once a revised business plan is known for the future, access the most appropriate type of funding which may well be longer term and cheaper for the business? This could well include different working capital financing products as well as longer-term debt propositions to fund a current structural deficit along with investment in a new or revised business plan.