Businesses struggling to access other sources of government help during the coronavirus lockdown can now obtain a state-backed business continuity loan that’s free of interest and repayments for the first year. Article by Nick Green.
A new lifeline has been thrown to small businesses who are struggling to survive during the COVID-19 lockdown. The Bounce Back Loan Scheme (BBLS) allows a business to borrow between £2,000 and £50,000 with no repayments due for a year, and no interest charged during that time either. After 12 months, interest will be charged at a fixed 2.5 per cent per year – a far better rate than can be found for other business or personal loans.
Any business can apply for a bounce-back loan, though being capped at £50,000 means they will be of most benefit to small businesses and contractors.
Why bounce back loans are needed – the problems with CBILS
The government’s main initiative to support businesses through lockdown is the Coronavirus Business Interruption Loan Scheme (CBILS). However, this has suffered from teething difficulties and delays in accessing the money. Many smaller businesses in particular are being left high and dry. Launched in March, the scheme received 100,000 enquiries per week, but by the second week of April just 2,000 loans had been issued – totalling under £300m.
The main problem with CBILS has been the sheer scale of the demand, with businesses simply unable to get through either by phone or email. The application itself is also onerous, requiring all the usual trappings of a business loan application, such as management accounts, business plans and cash flow forecasts.
Another big flaw that has emerged is the lack of a full government guarantee. CBILS is only fully backed by the government if the business is shown to be ‘viable’, according to criteria set out by the British Business Bank (BBB). But working out which businesses are truly viable in this unprecedented crisis is a tall order. Banks are understandably wary of lending to businesses that may yet fail (through no fault of their own), only for the government to claim in hindsight that the business was never viable, and refuse to guarantee the loan.
So the new BBLS ‘bounce back’ loans are welcome news – because these do come with a full government guarantee. As such, they should also be easier to obtain. Here’s what we know about them so far.
Is my business eligible for a bounce-back loan?
To be eligible for a BBLS loan, you must be able to show that:
- Your trading activities have been adversely affected by the COVID-19 lockdown
- Your business wasn’t already in trouble at the end of December 2019
- The business isn’t bankrupt or in liquidation now
- You were trading before 1 March 2020
- You’re not using any of the other coronavirus loan schemes (e.g. CBILS) – unless you intend to use your BBLS loan to pay back the other loan in full
- More than half of the business’s income comes from its trading activity
- You’re not in a restricted sector (i.e. a credit institution, insurance company or public sector organisation)
These are the main points to be aware of, though further conditions may apply.
Although you won’t need to show full accounts or a business plan, you will need to provide details of your turnover and a copy of your tax return.
It’s worth noting that although your business must have been viable pre-lockdown, you don’t have to demonstrate its viability now – making it much easier to get this kind of loan than a CBILS one. Furthermore, having a bad credit rating (either business or personal) will not hinder your application.
How much can I borrow with a BBLS loan?
You can borrow up to £50,000 in the form of a bounce-back loan, or 25 per cent of your total turnover, whichever is lower. Turnover is calculated based on 2019 figures, or your most recent pre-lockdown trading if your company is very new.
What are the repayment terms for a bounce back loan?
You’ll need to repay your business bounceback loan within six years, but you can repay it sooner without penalty. No repayments are required in the first 12 months and no interest will be charged during this time. After that first year, interest will be 2.5 per cent annually.
Another good feature of BBLS loans is that they are unsecured – that is, you do not put up any collateral. This means that if you can’t repay them, you don’t automatically lose another asset. Defaulting on the loan would damage your business’s credit rating, but not your personal one.
What can I use the BBLS money for?
Business bounce back loans are intended to provide working capital, to keep your business afloat during the crisis. This means you can use it for
- Paying staff salaries (including your own)
- Paying suppliers
- Paying off existing loans
- Paying utility bills / overheads
- Providing a cash reserve to maintain cash flow
- Any other necessary business running costs
The government have made it clear that you can use a BBLS loan to support your income. However, you can’t use it to pay dividends (unless there is a profit on your balance sheet but you don’t have the cash to pay it out as a dividend). You can use it to pay salaries, but not to increase them. Therefore if you as director usually take most of your income as a dividend, you may not be able to take your full usual income from the loan.
One thing you may be able to do is take some of the money as a director’s loan. The money from the BBLS loan belongs to the company, but as director you can borrow this money from the company to use as personal income, provided you repay it in good time. If you don’t repay a director’s loan within nine months there is a tax charge of 32.5 per cent, so be careful of this.
Which banks are offering bounce back loans?
The following banks are currently offering (or soon to offer) BBLS loans. They are mainly lending to existing business customers, but some may be willing to take on new customers.
- Bank of Scotland
- Clydesdale Bank
- Danske Bank
- Lloyds Bank
- Starling Bank
- Ulster Bank
- Yorkshire Bank
Terms are the same across all participating banks.
Can contractors use the BBLS loans?
The short answer is yes – contractors and freelancers are considered businesses in their own right, so can use the bounceback loan scheme. In most cases, contractors will probably want to use it to supplement or replace their income if they haven’t already furloughed themselves.
If you operate as a sole trader, the BBLS loan will effectively operate as a personal loan. You take the money directly, and are personally liable to repay it.
If you operate as a limited company (either your own or an umbrella company) then the money from the loan will sit with the company. You can use this to pay your existing salary, but you can only use it to pay dividends if there are sufficient profits to do so.
When can I apply for a bounce back loan?
The BBLS loans are available now (as of w/c 4 May). Some banks may be quicker off the mark than others, so patience may still be required. If your bank isn’t on the list of participants, it’s worth enquiring anyway, as the COVID-19 landscape changes on a weekly basis. Find participating lenders here.
For more about BBLS loans and other ways to help your business through the crisis, see Where can my business find more funding in lockdown?