John Glencross, CEO of Calculus Capital and EISA Board member believes the Coronavirus Business Interruption Loan Scheme (BILS) is not even beginning to address the needs of most growth companies which are the drivers of tomorrow’s economy. These companies are where the new technologies and science are being developed.
Glencross says “One eye opening fact is that four of our portfolio companies are using their science and expertise to support the fight against Covid 19, in some cases, possibly, in game changing ways, but none would qualify under BILS in the way it is being applied by the banks even after the recent modifications.
One of those companies has already received a visit from the Prime Minister as being part of the fight against Covid 19. A generation of companies developing the science and technology for tomorrow (and for the current crisis) is in jeopardy.”
Whilst there may be growing coverage of the issues in the mainstream press, we have created a standardised form that has gone out to all of our portfolio companies. These forms provide evidence from growth firms about the considerable obstacles facing early stage and growth stage businesses when applying for a loan which was promoted as being a lifeline in a time of need.
One of the participating banks which one company spoke to is making assessments based on the company’s 2019 (calendar year) financial results and, if they were not profitable, irrespective of being a growth business which has previously successfully EIS finance and which is transitioning to full-scale commercialisation, the company would be unlikely to qualify for a loan. As most early stage and growth stage businesses are, by definition, currently loss making, as are the majority of EIS companies nationwide, this automatically disqualifies these companies from the loan guarantee scheme. The few banks which have allowed applications to proceed past this point are only doing so by asking for very substantial personal guarantees held against 100% of the loan. Furthermore, companies are being told that they can only borrow up to a maximum of 2x the annual salaries of full-time employees included in the 2019 annual accounts – another requirement that appears not to be included in any CBILS related published information.
At another high street bank is applying debt service metrics linked to positive EBITDA and Net Cash to all loan applications, which means that many SME businesses, especially in the EIS / VCT and other early stage and growth companies will not qualify – even though these are the types of companies that the CBILS scheme was intended to help.
From what we’ve been able to gauge, companies are receiving conflicting information from branch to branch at the same bank. This seems to be a direct consequence of this being treated as a box ticking exercise, often undertaken by bankers with varying levels of experience, that are lacking the authority to take decisions or escalate to someone who is able to authorise an application that falls outside of debt service parameters.
The end game here is that many SME companies are not applying because they believe their applications will be rejected from either a personal guarantee or debt service requirement and, for those that do, the banks have provided themselves with all the scope needed to only approve the most creditworthy and low risk applicants.
Given that the banks’ exposure in this scheme is only 20% of the total loan amount and that it was triumphantly heralded as white knight for the SME sector, the hurdles clearly being placed by the banks need to be urgently reviewed and removed if this scheme is to help the SME sector to the extent it is needed and, indeed, was intended.
Information from other sources suggests early stage and growth companies have on average 2y days cash to meet outflows if sources of income suddenly drop. The experience for our companies is closer two three months or one quarter.
Furthermore, business angel investment has virtually ceased. Two things are of paramount importance:
- Changing the guidance to banks such that the BILS can reach and be applicable to growth companies.
- Raising temporarily the level of tax relief given to business angel and other EIS investors to restart the flow of equity capital to these companies.