Is a CBILS Loan the Best Option for SMEs Affected by COVID-19?

Points to look out for with CBILS loan

Figures released by the banking lobby group, UK Finance, showed that only one in five UK businesses who have formally applied for government-backed loans have been granted emergency funding during the COVID-19 lockdown. But is taking out a loan under the Coronavirus Business Interruption Loan Scheme the best option?

Chancellor Rishi Sunak announced a new Coronavirus Business Interruption Loan Scheme (CBILS) at the 2020 Budget to facilitate loans up to £5m for small businesses in the UK.

A total of 6,020 loans worth £1.1bn had been issued under the CBILS as of 14 April. That is nearly twice the 3,309 issued the previous week.

UK Finance said 21% of the 28,460 formal applications had so far been approved for the government-backed loans, which are interest-free for 12 months.

The Coronavirus Business interruption Loan Scheme has been designed to support small businesses to cover this difficult period. However, there are some things business owners should know before applying for a loan through the CBIL scheme.

For these companies struggling to stay afloat, Reece Tomlinson, CEO and Founder of RWT Growth, financial advisors for the global SME arena, provides guidance on the nuances of the scheme, along with the potential impact on businesses and business owner;.

1. Services and short-life products

If you’re in the service sector or produce goods that have a short shelf life, you will likely never make up the revenue and profits you are losing right now as a result of your business being impacted by COVID-19.

It is important to understand this notion. Incurring and paying costs for any other reason than to merely keep the business alive or advance some strategic priority, the company would otherwise pursue regardless of COVID-19 with CBILS loans is a risky idea.

2. It will need to be paid back

This is important because the business will need to, at some point in time, be able to start making payments from the cash flows of the company.

For example, if your business borrows £250,000 via the CBILS, you can expect your future cash flows to be no less than £50,000 lower per year for a minimum of five years (assuming no interest or lender-levied charges).

When one adds in the interest and lending fees, the actual amount being paid annually will certainly be higher. It should also be noted that the shorter the loan repayment period the higher the annual payments will be (CBILS loans have a maximum finance term of up to 6 years).

3. Repayments to be paid after tax

Interest payments can be paid with pre-tax pounds, principal payments cannot. As a result, the payments you make to repay the CBILS loan will be repaid with primarily post-tax pounds.

Under the CBILS, the government will make a business interruption payment to cover the first 12 months of interest payments and lender-levied charges.

4. Understand the impact CBILS will have on future cashflows

As per point three, repaying CBILS loans will come largely out of the post-tax future cash flows of the business. It is very important that you perform a cash flow forecast for the duration of the period in which the CBILS loan is being repaid to fully understand the impact on the business.

5. Do not personally guarantee the loan

Unless you have already personally guaranteed numerous other business debts and adding a CBILS loan to the list of lenders will not make any difference to your financial position should the company not be able to recover; I would strongly suggest that you do not personally guarantee any loan unless absolutely necessary.

Given that CBILS finance will be 80% guaranteed by the UK government, I would suggest you push back on any personal guarantees and limit personal exposure as much as possible or stay below the £250,000 threshold for personal guarantees to be required.

6. Run a sensitivity analysis

The longer the economic impacts of COVID-19 go on for, the less likely that things will return to normal at a fast pace.

It is important to run cash flow scenarios that show how the business will perform should demand for your products and services be weaker than one would anticipate. Use this analysis to help determine whether CBILS loans are feasible for your business.


The CBILS requires that the borrower provides to the lender a; borrowing proposal which the lender would consider viable were it not for the COVID-19 pandemic and one that provides assurance that the business will be able to trade out of any short-term or medium-term difficulty.

What this means is that the onus will be on the SME to provide a borrowing proposal that shows how CBILS loans will be utilised for strategic uses and not simply business continuance purposes.

Therefore, whilst the CBILS may certainly help some SMEs access much-needed debt, the majority of SMEs may find that CBILS loans are not the life raft they have been touted to be.

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