Bouncing back to happiness

Just as the government has been handing out money to businesses under threat as a result of coronavirus, so it has a number of loan-based programmes to keep struggling firms afloat, writes Adam Bernstein.

One, the Bounce Back Loan (BBL), is a cracker but it’s closing to new applicants in November.

Defining a Bounce Back Loan

With a BBL a business can borrow between £2,500 and £50,000 to a maximum 25% of its annual turnover over a six-year period. No interest is charged and no repayments are made during the first year. For the remaining five years of the loan interest is fixed at 2.5% which is very low compared to a normal commercial loan.

On top of the low cost is the ability to repay a loan early without being hit with any repayment charges. Further, there’s no requirement or need to offer personal guarantees to secure the loan as it’s backed by the government.

The scheme is open to all – sole traders, (sole) directors of limited companies, and also those who are self-employed. But there is one snag – the business must have been going before March 2020, be still running, and have been affected by coronavirus. Other criteria are that 50% of income must be from trading, it’s not a business in difficulty as at 31 December 2019, it’s not in a restricted sector, and it’s not in receipt of another government lending programme. All of the details are on the gov.uk website, under Apply for a coronavirus Bounce Back Loan.

Seeking and obtaining a BBL doesn’t remove the ability of the applicant to apply for the Self-Employment Income Support Scheme or Universal Credit. Also, unlike the furlough scheme, directors and employees can carry on working in the business. It’s also not taxable.

BBLs have been very well received. According to data on smallbusiness.co.uk, the banks loaned £3.3bn on the first day with more than 100,000 businesses applying, with an average loan size of £30,000. And by the first week in August, the government released figures that stated that some 1.13m BBL’s had been agreed out of more than 1.37m applications, to a value of £34.34bn; the statistics show that more than 82% of applicants were successful.

It’s worth noting that applicants, once approved, cannot top up or increase a BBL. Nor can they apply for a second BBL for the same business. Thought must therefore be given to the amount requested.

A natural question to ask it what a BBL can be used for. As per the rules, there are few restrictions. All the regime says is that “the business must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital, and not for personal purposes.” This is so wide and can therefore include investment, the cost of running a business such as bills, debts and employees. Directors could also take money as dividends. Or the money can be used as a buffer against income shock.

The reality is that a BBL could be used to refinance expensive debt or even pay tax bills.

Where to apply

As to where to apply for a BBL, the government’s website – gov.uk – lists all of the currently accredited banks. All the usual suspects are there – HSBC, Lloyds, TSB, Barclays, Santander, NatWest, RBS and Bank of Scotland, plus the Co-operative Bank, Clydesdale Bank, Yorkshire Bank, Danske Bank, Ulster Bank and Starling. Also, there’s Starling, Paragon, Capitalontap, Arbuthnot, Coutts and Metro.

Noticeably missing is Nationwide and Monzo.

Clearly those who already bank with these accredited institutions are going to find life much simpler as they’re a known quantity. Those who want to get funding from these banks will have to open full (or feeder – ‘basic’) accounts if they don’t already bank there.

Now here’s the catch: While limited companies need a separate and distinct business account, sole traders don’t. BBLs generally require separate business accounts and this may lead to the need to have a fee-bearing account – only a handful including HSBC, Clydesdale Bank and Yorkshire Bank will lend to existing personal customers.

Fundamentally, the chances of success are improved by applying to the business’s own bank or one where the owners (directors) have a personal account in good standing.

Applicants should set their expectations accordingly – with such a volume of applications it can take time to progress from a waiting list to being granted (rejected) for a loan. Partly, this is down to press of business but it’s also down to due diligence checks to reduce fraud.

Lastly, a rejection by one bank does nothing to prevent an application to another, subject to the need to open a new account.

To end

It’s entirely true that a BBL is a very attractive proposition, and one that is backed by the government. Even so, a BBL is still debt which must be repaid, with interest, if it’s kept for more than a year.

Content extracted from https://www.boatingbusiness.com/news101/comment/business-matters/bouncing-back-to-happiness