100% government guarantee for Bounce Back Loans

Chancellor of the Exchequer, Rishi Sunak, relented to the pressure last night (27 April 2020) and announced that small firms are to get access to 100% Government-backed loans from next week.

"Hurrah", said many relieved small businesses and their lobby groups.

Catchily titled "The Bounce Back Loan Scheme", the maximum loan amount is £50,000 or 25% of annual turnover and it will only require completion of a two-page self-certification form on-line to apply.

The money is promised to be in bank accounts within days of applying.

There aren't any details yet on interest rates - we assume these will be dictated by the lenders with some Government oversight to prevent profiteering - although it is stated that there will be no capital or interest repayments for the first 12 months, and the Government will cover the interest for this period. Loan terms will be up to six years.

If you're a small business owner, you may well be thinking why wouldn't you apply and, indeed, why wouldn't you?

A lifeline for many

We can understand Rishi Sunak's reluctance to agree to 100% guarantees earlier. He has, in a stroke, made it very difficult for the lenders to decline an application without risking a media storm.

As we understand it, the application will only require the applicant to self-certify that their business was "not undertaking in difficulty" (which is government speak for "viable") on 31 Dec 2019 and for the lender to do a very simple viability test based on some balance sheet metrics. The inference is that the lender is expected to agree in the significant majority of cases.

This is a fantastic, perhaps life-saving, initiative for the very many credible small businesses out there that are struggling to get through the lockdown, but it is also open season for the opportunist and it remains to be seen how the lenders will sort one from the other.

In his speech in the House of Commons, the Chancellor alluded to the risk when justifying why the guarantee was capped to loans of £50,000 and not extended to larger loans, which remain only 80% guaranteed.

He said: "We should not ask the ordinary tax-payers of today and tomorrow to bear the entire risk of lending almost unlimited sums to businesses who many, in some cases, have little propsect of paying those loans back, and not necessarily because of the impact of the coronavirus".

Quite. The sums might now be limited, but there's going to be a lot of marginal businesses applying and the risk of non-repayment remains a substantial one. No doubt that's seen as part of the price of the crisis.

The scheme launches on 4 May 2020 and we'll see then what, if any hurdles, exist to loans being agreed.

A few thoughts from us before you dive in

1. The 48 accredited lenders are likely to be inundated with applications. If they thought they were busy processing CBILS applications, it will be nothing compared with the deluge they are now likely to face from Monday. Promises of quick delivery of funds might be hard for the lenders to meet in the early days, so do allow for this.
2. Remember, if you do apply, that it is a loan and not a grant and will need repaying. 12 months will soon pass and a loan of £50,000 over 5 years could cost in the region of £1,000 a month to service.
3. If your business does fail as a result of not being able to make the repayments, the experience will be a painful one even if you won't ultimately be on the hook personally for the outstanding loan amount. The lender will have to exhaust all other avenues to recover the debt, including liquidating your business, before it can call in the Government's guarantee.
4. £50,000 may not be enough for your needs and you won't be able to have a Bounce Back Loan and a CBIL. If you need more than £50,000, you will need to go down the CBIL route for the whole amount or look outside of the government schemes altogether.
5. If you're one of the few businesses that has successfully applied for a CBIL loan in recent weeks and are now thinking you've been disadvantaged, you can re-engineer the loan into a Bounce Back loan with your lender until 4 November 2020.

While you are unlikely to need any help with applying for a Bounce Back Loan, please still talk to us if you are in any doubt about what to do. We can help you work out your total finance requirements and what the right combination of products is likely to be - not just for the duration of the crisis, but into the future too. We are also here to support applications for CBILS loans, which remain a lengthy and admin heavy process.