UK Covid-19 Business Loans Explained
Are you considering finance options to fund your firm’s post-Covid recovery? Here’s a closer look at the government-backed borrowing options currently available, along with our tips for maximising the chances of a successful loan application.
You may have missed the details amid all the Covid-related noise, but there are actually two schemes in place:
Coronavirus Business Interruption Loan Scheme (CBILS)
This was announced shortly after the lockdown began. Delivered through a panel of accredited lenders, CBILS enables small and medium-sized enterprises (SMEs) to access loans of up to £5 million. These loans are 80% guaranteed by the government.
Bounce Back Loans (BBL)
This scheme was announced several weeks after CBILS and is meant to be a much simpler, quicker way of unlocking loans of between £2,000 and £50,000. Crucially, these loans are 100% government-backed, meaning less risk to the lender and (in theory) a quicker assessment process.
Here’s a rundown of the eligibility rules, the terms available and application process for each scheme...
Who can apply?
For both schemes, businesses must:
Be based in the UK
Have an annual turnover not exceeding £45 million
Be able to demonstrate that the business has been adversely impacted by coronavirus, and that the business would be viable were it not for the pandemic.
Under BBL, businesses can borrow from £2,000 up to £50,000, up to 25% of a business’ annual turnover (usually based on the 2019 calendar year). Only straightforward term loans are available under this scheme, i.e. not overdrafts or invoice financing facilities.
As from 4 May 2020, the minimum amount of finance available under CBILS is £50,000. Lenders can provide up to £5 million in the form of term loans, overdrafts, invoice finance and asset finance.
Interest rates and finance terms
The interest rate for BBL is set at 2.5% per annum. No interest will be charged and no repayments will need to be made in the first 12 months. The length of the loan is six years, but early repayment is allowed, with no early repayment fees. BBL lenders are not permitted to take personal guarantees or take recovery action over a borrower’s personal assets.
With CBILS, lenders can set their own interest rates. For term loans and asset finance facilities, the length of the arrangement is up to six years. For overdrafts and invoice finance facilities, it is up to three years. Lenders are not permitted to require personal guarantees for arrangements under £250,000. For loans above that amount, lenders can require personal guarantees, but these must exclude the borrower’s main home.
Applying for a loan
The British Business Bank maintains a list of CBILS accredited lenders. Borrowers are encouraged to explore the list, weigh up what’s available and then approach lenders direct.
CBILS encompasses a wider range of finance facilities than BBL, and lenders are free to set their own interest rates. There are currently around 90 lenders on the CBILS accredited list - but the amount and type of finance offered varies between lenders.
BBL is a much simpler scheme with a set interest rate of 2.5%. It’s designed to require much less shopping around to secure funding, and the panel of accredited lenders is much smaller (mostly high street banks). You will almost certainly find it easiest to approach your existing bank for BBL funding. In fact, many BBL lenders currently state that they can only accept applications from existing customers at present.
There was a gap of around a month between the launch of CBILS and the bounce back scheme. This meant that firms requiring less than £50,000 and that were quick off the mark in seeking a support loan, found themselves saddled with interest rates that in some cases were as high as 6%. If you’ve already received a loan of up to £50,000 under CBILS, you have until 4 November to transfer it into the bounce-back scheme, without facing a fee.
Tips for loan applications
Is a loan right for my business?
Remember that although these arrangements are government-backed, this does not mean ‘free money’. As a borrower, you remain 100% liable for the debt. As with any arrangement, defaulting on a coronavirus loan is likely to have a significant impact on your ability to get credit in the future.
Of course, a non-repayable grant is always preferable to a loan. So before committing to anything, make sure you explore the full range of support options out there, such as the Small Business Grant Fund (SBGF) and the Retail, Hospitality and Leisure Grant (RHLG), along with the flexible furlough scheme. The government’s coronavirus business support page provides a useful overview of what’s currently available.
Information required in support
The BBL application process is designed to be easy and fast, with most lenders promising an application processing time of just a day or two. Typically, where you already have a business account at the bank where you are applying, the bank will ask for a turnover summary for 2019. Sole traders who use a personal current account for their business may be asked to produce a copy of their 2018/19 self-assessment tax return.
For larger CBILS applications, lenders will typically require more detailed information in support. This is especially the case if you do not have an existing relationship with the lender. Expect to be asked for the following:
A funding proposal, setting out the amount of funding sought, your reasons for needing the funding and its intended purpose.
Three years’ audited accounts.
Forecasts, including a realistic projection of income/outgoings for at least the next 12 months, taking the impact of Covid-19 into account (the input of experienced small business accountants can be especially valuable here).
Assess your outgoings
Especially for CBILS applications, lenders will want to see evidence of management best practice, including steps taken to reduce your outgoings. Details of staff furloughing arrangements, rent repayment holidays, deferred tax arrangements and other measures taken can support your application.
Provide evidence of agility and business resilience
How have you adapted your service range to take into account the ‘new normal’? What changes have you made to working practices (working from home, for example)? Even though revenue may have taken a temporary hit, what steps have you taken to maintain relationships with longstanding clients? Evidence in these areas can help to demonstrate that you are responding proactively to a new trading landscape.
Need further help?
For a full and frank assessment of your financing options, preparation of realistic forecasts, cash flow assessments, as well as help with loan applications, North London Accountants, MJH Accountancy are here to help. To explore your options, speak to us today.