VITAL CASH INJECTION FOR SMALL AND MEDIUM BUSINESSES
The latest financial support against the economic effects of coronavirus comes in the form of a 100% government backed loan of up to £50,000 for businesses.
Below we will explore more on the details of the scheme, who is eligible, the terms of the loan and how to apply, together with some pros and cons of the loan scheme.
What is the Bounce Back Loan Scheme (BBLS)?
The new bounce back loan scheme launched on 4 May 2020 in a bid by the government to speed up access to coronavirus financial support.
Who is eligible for the BBLS?
All businesses are eligible to apply under the BBLS. Eligibility is on a self-certification basis i.e. the business must declare:
- they are UK based, established on or before 1 March 2020;
- that more than 50% of the income of the business is derived from its trading activity;
- they have been negatively affected by coronavirus;
- they are still trading at the date of application (temporary cessation due to coronavirus does not apply); and
- that the business was not a “business in difficulty” as at 31 December 2019.
Businesses who are not eligible are:
- banks, insurers and reinsurers (but not insurance brokers);
- public-sector bodies; or
- further educational establishments if they are grant funded; state-funded primary and secondary schools.
There are also certain restrictions for:
- production of agricultural products; or
- fisheries and aquaculture.
You cannot apply for BBLS if you have already received a loan through Coronavirus Business Interruption Loan Scheme (CBILS). However, if your CBILS loan would meet the BBLS criteria then you can apply to transfer your CBILS loan to a BBLS loan.
Who is providing the BBLS?
There are currently 11 accredited providers with more being added. An updated list can be found on the British Business Bank website here
Link to - https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/bounce-back-loans/current-accredited-lenders-and-partners/
It is advised that you first apply to the bank where you currently hold an account used for business. The majority of lenders require you to have a bank account with them to apply for the scheme. Some however do not, for example, HSBC will allow you to set up a “temporary feeder business account” to receive the monies into before paying them out to a different account.
What terms and conditions for the BBLS?
The terms and conditions of the loan are:
- the loan amount must be between £2,000 - £50,000 and is capped at 25% or less of the turnover for the 2019 calendar year (or an estimate for businesses established after 1 January 2019);
- the interest rate is fixed at 2.5% per annum;
- the term of the loan is fixed at 6 years. However, there are no early repayment penalties should you wish to repay the loan over a shorter term;
- the government will cover the first 12 months of interest payments on the loan;
- the borrower will benefit from a 12-month principle repayment holiday;
- the lender will not charge the borrow any fees relating to the loan; and
- the loan will be 100% government backed meaning that this will be an unsecured loan for the business and the lender will not request personal guarantees.
Furthermore, claiming under BBLS does not affect your eligibility for other Government personal support for example an individual can still claim Self-employment Income Support grants.
How do I apply for the BBLS?
Application for BBLS will be via a short two-page form accessible on the lenders website. As mentioned above, in most cases you will require a bank account with the lender to apply.
The information you will need when applying is:
- the business annual turnover for the calendar year 2019 (or an estimate);
- the account number and sort code;
- the amount you want to borrow; and
- self-certification that the business meets the eligibility criteria above.
If your trading receipts and payment activity is conducted using a personal bank account rather than a designated business account (potentially in the case of smaller sole traders), you may be asked to supply a copy of your 2018/19 self-assessment tax return.
The Treasury has stated funds should be received the day following application. However, with over 45,000 applications reported to have been received on the first day the scheme was available there have been some teething problems.
The scheme is initially available for six months to at least 4 November 2020. The Government have further confirmed that the scheme is demand led, as opposed to there being a set pot of funds available.
Considerations to take into account when applying to the BBLS
Advantages of the BBLS
The major advantage of the BBLS is it is available to all business and quickly. Therefore, it will help those business that have fallen through the gaps, a primary example being sole director limited companies who do not qualify for the self-employment income support scheme. These individuals would usually structure their remuneration as a minimal salary with the majority of income paid through dividends, therefore not benefiting from the coronavirus job retention scheme.
The Treasury has confirmed that limited company directors are eligible for the BBLS as long as they are “applying on behalf of their business” and “the loan must be used wholly for business purposes, not personal purposes”.
The Treasury have confirmed that funds received through the BBLS can be used to pay directors remuneration and other wages stating that “The loan can be spent on investment or working capital for the business - including bills, running costs and wages.” However, it should be noted that dividends can only be paid from retained profits.
The lack of interest or capital repayments in the first year makes these loans attractive compared to normal finance. Furthermore, the fixed rate and absence of early repayment penalties makes these loans cheap and flexible in comparison to standard commercial lending.
It may be worth considering using the BBLS to pay off existing finance, which the Treasury has confirmed is an acceptable use of the loan funds.
Disadvantages of the BBLS
Whilst we have discussed that this is a cheap form of finance compared to other commercial lending, this is still debt finance, not a grant.
Despite the government guarantee, failure to meet repayments will result in debt recovery proceedings against the business, regardless of whether it is an incorporated business or not.
Lenders will be required to take recovery action against the business such as seizing assets and court proceedings prior to making a claim to the government. However, there are no personal guarantees, therefore no recovery action can be taken over the borrower's main home or primary personal vehicle, but, for sole traders or partnerships, other personal assets may be at risk of recovery action.
The message here is to think carefully before taking on debt finance, especially if the business is already indebted, and do not borrow more than you need.
In summary the BBLS is an attractive option to many businesses in need of an immediate cash injection due to the adverse effects of coronavirus on their business.
There is no rush to apply to the scheme so you should take your time to consider whether debt finance is a suitable and affordable option for your business and if so the level of finance that is required.
If you would like to discuss any of the above in more detail, please get in touch.
All information is correct as of 10.00am 5 May 2020, however as this is a fast-moving situation so please check all details fully before applying to the BBLS.