CBILS and the Impact on the Funding Landscape

As the deadline for CBILS applications fast approaches (30^th September), we thought it would be a good time to take stock. Heather Bamforth asks our Corporate Finance Manager and Commercial Funding specialist, Stephen Dinsmore his opinions on the funding landscape.

Q1: What effect has CBILS had on funding opportunities? Has it led to different borrowing habits/more structured deals?

CBILS has drastically changed the funding landscape since its inception in March of this year. Initially, businesses were only able to access the scheme through their own bank, which, combined with a retraction of the alternative lenders, led to a substantial reduction of options when businesses were looking for funding. As the market has opened and alternative lenders have become accredited to offer CBILS, options have expanded.

This has been to the detriment of Asset Based Lending (ABL) products such as Invoice Finance, as businesses have looked to secure cheaper money through the government backed schemes, often with no personal guarantees. The ABL marketplace has been substantially quieter than usual, however, I believe this is likely to change once CBILS comes to an end.

Q2: What is the appetite for new lending (i.e. to new clients) at the moment?

From a bank point of view, the appetite for lending to new clients is limited for several reasons. Firstly, the majority of banks are unable to see clients face-to-face, with many saying it will be January 2021 before this happens, secondly, there is an acknowledgement that the full extent of the pandemic will not be felt until schemes such as furlough and VAT deferrals have come to an end, and thirdly, there is an unprecedented level of demand from their existing book so they are focussing on helping those clients that they understand and have a trading history with.

The alternative market has a strong appetite for new lending; I am unsure what this appetite will look like once October arrives due to the end of CBILS. My suspicion is that products such as Invoice Finance and Asset Finance will become more prevalent as these are more secured than other types of lending, allowing businesses to leverage their balance sheet to provide working capital.  

Q3: Will we see refinancing as the first year of CBILS approaches its end?

Who knows! I suspect that some sectors will need to refinance their CBILS as a 5 year amortisation period might put too much pressure on cash flow. Once the banks start to open back up it will be interesting to see if it is possible to switch banks and move a CBILS loan from lender to lender.

Q3: How do you think funders will deal with any potential distress in a business where refinancing is being considered (especially with HMRC changing to preferential status in December)?

I think the change to preferential status will have a particular effect on the stock finance marketplace, with lenders either pulling out the market or reducing appetite. Any lenders who are lending against the assets of the business will likely continue with business as usual whilst keeping a greater eye on the HMRC position of the business than previously.

Any lender likely to be pushed further down the pecking order by the change of HMRC status will undoubtedly have to amend their credit policy to reflect the additional risk, and I expect these lenders to tighten up their appetite for new lending or seek additional security.  

There is a potential challenge on the horizon once HMRC’s agreements around VAT deferrals and time to pay agreements, provided during the lockdown period, become due for repayment. At the minute it is unclear how aggressive HMRC will be around these payments, if there is any further scope for repayment plans or whether they would look to take formal action against these businesses, especially given their preferential status.

Q4: Any key tips from the lockdown period that might help businesses navigate the next six months?

1. Business owners should continue to focus on their cash position – lockdown has confirmed that the old mantra “cash is king” is still as important as it ever was.
2. Lean on your advisers – dealing with a problem sooner rather than later will improve your chances of success.
3. Make sure you plan properly – cash flow forecasting will help you do that.