The announcement on Monday that a further extension to the funding available to SMEs would become available with effect from next Monday 4 May is extremely welcome.
Loans of up to £50,000 will become available and will be backed 100% by the Government unlike the CBILS loan scheme which is backed by Government up to 80% but which many companies have not been able to access.
On the face of it, these loans will be easy to access and will come on stream from next Monday. However, it may not be the Panacea that everybody is hoping for. If your company is deemed to be « an undertaking in difficulty », you will not be eligible. Any undertaking less than three years old is not « an undertaking in difficulty » but any business that is older and that has negative reserves, even if it has been trading profitably and in the most recent times, will not be eligible.
Part of the problem is that companies in the United Kingdom have very low share capital but are often backed with monies put in by the owner managers. We are looking to see if there is any way that loans from shareholders to companies can be taken into the definition of capital so as to make a lot more companies eligible for these loans but unfortunately, it appears that this new loan is subject to EU rules and therefore it may not be possible to get the terms and conditions altered.
We will continue to look at making representations to Government to ease the position for our clients.
If you are thinking about making an application for a « Bounce Back » loan, please see the text below. It is fairly hard to digest but basically if your reserves are negative, you are unlikely to qualify. If you want any help in interpreting this legislation, then please do not hesitate to call us. We do not however want clients to waste time applying for loans that they are not going to get!
« Please note that one exception is that any undertaking less than three years old is not considered to be an undertaking in difficulty.
What is an undertaking in difficulty?
Undertakings in difficulty as defined under the State Aid rules should not be supported, in accordance with Article 3.3(d) of the ERDF Regulation (EU) No 1301/2013.
The definition under State Aid rules that should be used when assessing whether an undertaking constitutes and undertaking in difficulty is set out in the General Block Exemption Regulation (GBER), No 651/2014 . Article 2 para 18:
“‘undertaking in difficulty’ means an undertaking in respect of which at least one of the following circumstances occurs:
(a) In the case of a limited liability company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its subscribed share capital has disappeared as a result of accumulated losses. This is the case when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital. For the purposes of this provision, ‘limited liability company’ refers in particular to the types of company mentioned in Annex I of Directive 2013/34/EU (1) and ‘share capital’ includes, where relevant, any share premium.
(b) In the case of a company where at least some members have unlimited liability for the debt of the company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses. For the purposes of this provision, ‘a company where at least some members have unlimited liability for the debt of the company ‘refers in particular to the types of company mentioned in Annex II of Directive 2013/34/EU.
(c) Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors.
(d) Where the undertaking has received rescue aid and has not yet reimbursed the loan or terminated the guarantee, or has received restructuring aid and is still subject to a restructuring plan
e) In the case of an undertaking that is not an SME, where, for the past two years:
1. the undertaking’s book debt to equity ratio has been greater than 7,5 and
2. the undertaking’s EBITDA interest coverage ratio has been below 1,0.’
N.B. All parts of the test must be applied (as appropriate) in order to determine whether an organisation is an undertaking in difficulty. »