Bounce Back Loan Scheme (BBLS) for Small Businesses
Over the last few weeks, the unprecedented has come to be run of the mill. We’ve become accustomed to the Chancellor Rishi Sunak announcing state interventions into the economy on a scale never seen before. This week we saw it again with a streamlined Coronavirus lending system which can give small businesses access to an emergency lending system at 24 hours’ notice.
The Government had been facing calls to provide more support to small businesses with reports circulating that many faced the prospect of imminently running out of money. Earlier in April, it was announced that two small business relief programmes had run out of money as lawmakers fought over refunding programmes.
Concerns over the uncertainty and time taken for funding from the Government’s furlough scheme had already seen many sweating over whether they could retain staff. The harsh truth for many businesses is, like many individuals, they are often just a couple of unexpected events from oblivion. They simply couldn’t afford to keep operations ticking over until Government support arrived.
With a 24-hour turnaround between application and your funds arriving in your account, this scheme attempts to plug the gap.
What is the scheme?
The bounce back loan scheme will be open from 9am on Monday 4th May and allows small and micro businesses to apply for up to £50,000 of financing from their lender to cover them through the crisis. You can apply for a minimum of £2,000 and a maximum of a quarter of your last financial year’s turnover up to a limit of £50,000.
Concerns about whether or not lenders would agree to provide such loans, these will be 100% backed by the Government unlike the Coronavirus Business Interruption Loan Scheme (CBILS) which is only 80% state backed.
They appear to have learned the lessons from the CBILS which was slow, cumbersome and often failed to get money to businesses quickly enough. Its approval rates were less than half of an equivalent scheme run in Germany. 46% of applicant companies received loans compared to 98% in Germany. Loan terms were criticised for being more onerous in the UK and for paying out less money.
Applying for a bounce back loan
Everything about this process is tailored for speed. Applications are just two pages long, can be submitted online and only require basic details to verify that the company a) exists and b) is eligible for the scheme. Company directors need only certify that the information they have provided is correct and the lender will make a decision about whether to approve the loan. In some cases, you may have to provide a company tax return. The scheme is only open to those businesses which existed before March 2020.
The scheme is 100% backed by the Government which should remove most of the barriers to approving a loan. Under CBILS, many businesses had complained that they were rejected for loans, often without reason. The knowledge that the Government would take on 80% of the risk was simply not enough for the banks.
A business still needs to be considered ‘viable’ by banks, and the unique challenges of Covid 19 meant many of them simply cannot overcome this hurdle. For example, how can any company which had been relying on a surge of income during the summer which will no longer be there demonstrate viability?
Banks have also been asking for substantial amounts of paperwork including forward projections which businesses understandably argue are not realistic. We don’t currently know how long the lock down will last, how quickly it will be lifted, if there will be a second spike and how quickly the economy will get back up to speed. A business is entitled to ask how can it possibly produce accurate and realistic forward projections when so much is up in the air?
This time around, banks will not have to absorb any part of the loss onto their books if a loan cannot be repaid. They will also not have to make all the usual credit checks which can take time and effort. Once you’ve applied, and your information has been verified, the money should be in your account the next day.
Choosing between bounce back and CBILS
Businesses will not be able to apply for both a bounce back loan and the CBILS, which means they will have to choose between them. The advantages of bounce back loans are the speed of completion and the lower credit requirements.
CBILS, meanwhile, requires a longer application process and has more stringent credit checks. However, it does offer a higher credit limit of £5 million. It may be more appropriate for a business which still has enough cash in the bank to meet its payment obligations and can pass the tougher application requirements.
It may, though, be possible for a firm which already has a CBILS to switch it over into the bounce back scheme if it is under the limit. Equally, if a company has a bounce back loan, they may be able to switch it into a CBILS and take advantage of a higher credit limit.
There is no certainty about how much the loans will cost, but the Government says interest rates will be ‘low’. For the first twelve months of the loan’s lifetime, the Government will cover interest and fees which means there will be no financial liability for the borrower for a year.
Will it work?
Up until this point, the Government has used banks as its vehicle for getting the money where it is needed because they have all the mechanisms in place to put this into practice. However, the processes and administration required by the banks meant that, under CBILS, only a fraction of the money needed made its way into the economy.
The Government hopes that by taking on the enormous burden of underwriting these loans, they will negate such issues. If you’re a small business and you’ve been unable to access funding under CBILS, this could be the opportunity you’ve been looking for. However, taking on debt may not always be the best option for you and the situation is changing by the day. The Government has been evolving its approach almost daily as events play out. The chances are there will be changes and fresh measures brought in before this crisis is over.
It can be complicated and it’s worth getting expert advice from an accountant about whether this would be the best option for your organisation. They can look at your finances, assess which scheme would work best for you, or if there are other funding options which could cover the gap in the meantime.