Bounce back loans to provide a boost for small businesses

Posted: 28/04/2020

This article forms part of our coronavirus resource hub and, in particular, develops on a series of articles relevant to the Coronavirus Business Interruption Loan Scheme (CBILS).

Yesterday the Chancellor announced the so-called Bounce Back Loan Scheme which is the latest addition to the suite of support measures available for businesses.

What are the key features?

Under the scheme businesses will be able to borrow between £2,000 and £50,000. The Chancellor’s recent tweets suggest the borrowing amount will be 25% of turnover up to a maximum of £50,000 albeit the available guidance online does not reflect this yet.

The Government will provide accredited lenders with a 100% guarantee for the loan and will meet any lender fees and interest payments for the first 12 months. In addition, there will be no repayments due within the first 12 months.

Importantly, the scheme is advertised as a fast-track finance scheme with cash arriving within 24 hours of approval.

How to apply

The scheme is due for launch at 9am on Monday 4 May. Businesses will apply for the loan through a quick, short and standardised online application.

Eligibility

The Chancellor’s twitter account published further guidance on the application criteria stating that ‘there will be no forward-looking tests of business viability; no complex eligibility criteria’.

A business can apply for a loan if it:

• is not an excluded business (banks, insurers, some education providers, public sector bodies);
• is based in the UK;
• has been negatively affected by coronavirus; and
• was not an ‘undertaking in difficulty’ on 31 December 2019.

It appears this final requirement looks to address the hesitancy towards the taxpayer funding small businesses that were already going to fail prior to the coronavirus pandemic. There are particular tests relevant to this requirement, details of which fall outside the scope of this article.

Lessons from CBILS

The existing loan scheme available to small business, CBILS, has been viewed as failing to support small sized businesses suffering from cash flow disruption as a result of coronavirus.

Our previous articles on CBILS (available at our coronavirus resource hub) have highlighted some of the hurdles businesses have struggled to overcome. These included strict lender eligibility requirements and the lender’s preference to lend on commercial terms only.

The Bounce Back Loan Scheme promises to do exactly what CBILS has arguably struggled to do and offer an easier means of obtaining cash quickly for small businesses in need. The 100% government-backed guarantee reflects industry and media pressure to increase the lender’s appetite to lend by providing greater security and comfort through a higher guarantee.

The focus on speed of delivery of loans looks to mitigate concerns CBILS requirements were frequently onerous and fraught with delays.

It is important to note that if a business is claiming under CBILS, it will not be eligible under the Bounce Back Loan Scheme. However, a business that received a loan of up to £50,000 can transfer it to the new scheme until 4 November 2020, thereby benefitting from some of its more favourable provisions.

Looking forward

Swift delivery will be key to the success of the new scheme. The promise of a quick, simple process without arduous requirement may well mean delivery can match need. This could enable the UK to move closer to our European counterparts with an effective method of providing finance to small businesses.

The success of the scheme will also naturally depend on whether businesses are comfortable with increasing their lending in these unprecedented times, balancing the need for short-term cash against potentially high interest rates after 12 months. Directors will further be keen to ensure their decision to increase lending aligns with their directors’ duties and in light of the insolvency related offences (more here).

The announcement is, without doubt, welcomed by small business and we may find medium sized businesses carefully monitoring the performance of the scheme. If it is delivered successfully, the calls for 100% government-backed guaranteed CBILS loans may become louder.

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