Bounce Back Loans: £50,000 for small businesses

April, 2020

The government has launched a new loan scheme for small businesses called Bounce Back Loans. Here is what small businesses need to know.

Form of relief: a term loan borrowed from a high street bank for a period of up to 6 years. A list of participating banks can be found here.

Repayment: there is no penalty for early repayment. There is a 12 month repayment holiday for the first 12 months of the loan with the principal and interest repayable over the remaining 5 year term.

Interest: the loan will be interest-bearing at a rate of 2.5% set by the government. The government will pay interest for the first 12 months, and any arrangement fees.

Security: the government is providing a 100% guarantee to the lender. The lenders are not permitted to ask for personal guarantees. However, borrowers should note that on a default, the lender would still seek to recover as much as possible from the borrower. It is only once the lender has take all necessary steps to recover arrears (including winding up the borrower), that the government guarantee would kick in.

Amount available: a minimum of £2,000 and a maximum of £50,000 or 25% of turnover (whichever is smaller).

Eligibility criteria: a business must be a trading business both at 1 March 2020 and the date of the application, based in the UK and negatively affected by COVID-19. The business cannot have received any support under the Coronavirus Business Interruption Loan Scheme (CIBLS), or any of the other loan schemes. The business must be a company, partnership, or sole trader that is tax resident in the UK. More than 50% of the income of the business (together with that of any member of its group) must be derived from the trading activity. The borrower must use the loan for business purposes and not for personal purposes.

Business in difficulty: a business is required to declare if it is a “business in difficulty”. If the borrower is a “business in difficulty”, additional state aid rules apply. A “business in difficulty” is a business that meets one of the following criteria:

(i) individual or company that has entered collective insolvency proceedings;

(ii) limited companies which have accumulated losses greater than half of their share capital in their last annual accounts (though this does not apply to SMEs less than 3 years old);

(iii) partnerships, limited partnerships or unlimited liability companies which have accumulated losses greater than half of their capital in their latest accounts (though this does not apply to SMEs less than 3 years old);

(iv) where the business has received rescue aid and has not yet reimbursed the loan or terminated the guarantee, or has received restructuring aid and is still subject to a restructuring plan;

(v) a company which is not an SME where, for each of the last 2 accounting years (a) its book debt to equity ratio has been greater than 7.5; and (b) its EBITDA interest coverage ratio has been below 1.0.

A “business in difficulty” can still qualify for the scheme if it would not have received more than £177,800 in de minimis State Aid including the Bounce Back Loan and the 2.5% contribution by the government to the first year’s interest on the loan.

Lender assessment: lenders will not have to assess a business’ affordability or viability. Businesses just have to complete a short online form.

Timing: funds should arrive within 24 hours of approval.

Buckworths’ managing director, Michael Buckworth, said: “Businesses should remember that these are loans meaning that they will need to be repaid. A default by a borrower could trigger insolvency of the borrower. The 100% guarantee is there to protect the lending bank, and not the borrower.

Bounce Back Loans will provide a much-needed boost to short term funding for businesses who are not eligible for the Innovate UK funding and Future Fund investment scheme announced by the government last week. However, taking on further debt will not be attractive or viable for many businesses. The government still needs to reach out to private sector investors and provide financial support to encourage them to take on some of the risk and invest in earlier stage startups and small businesses not otherwise eligible for the schemes announced to date.

For assistance with this scheme, or any any legal or funding issues, please contact Buckworths on 020 7952 1723 or [email protected].

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