Government’s new "Bounce Back" Loan Scheme – will it bridge the diversity funding gap?
On 27 April 2020, the Government announced a new measure to help small businesses “Bounce Back” from the Covid-19 crisis by accessing loans of up to £50,000.
This measure to help small businesses through the Covid-19 crisis follows the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Future Fund Scheme. The Government’s unenviable task is to balance support for businesses in this unprecedented crisis with the reality that the bill for state support will be paid by taxpayers.
The current packages of support are welcome and show the Government is listening to feedback from business and adapting its economic response accordingly. CBILS allows companies with a turnover of up to £45million to apply for loans, overdrafts, invoice discounting and asset backed lending facilities of up to £5million.
Slow processing of CBILS applications and exclusion of larger businesses drew criticism and in response the Government announced CLBILS, which allows companies with sales exceeding £45million to access financial support. Larger firms are eligible to access up to £25million of finance and firms of a turnover in excess of £250million can access finance of up to £50million.
Many start-ups and high growth companies therefore do not qualify for CBILS or CLBILS as they don’t meet the criteria.
With the current approval rate for CBIL applications being just 1 in 5, the Government then launched the Coronavirus Future Fund (CFF), an unprecedented scheme under which the Government may hold direct equity stakes in British start-ups. Detail on the CFF scheme terms is to follow; our summary of the information available to date is here.
The CFF is welcome evidence of the Government’s support of high-growth, early-stage companies, but critics have alleged that it risks exacerbating the diversity funding gap; where businesses with ethnically diverse founders, women, or based outside London and the South East are less likely to have accessed venture capital funding and are therefore unlikely to have raised the requisite £250,000 in private funding.
The Bounce Back Loan scheme aims to support microbusinesses and is a package of support that may help bridge those diversity funding gap concerns.
This latest support package is expected to cover most of the UK’s 5.6 million microbusinesses with up to nine employees. Chancellor Rishi Sunak, said: “our smallest businesses are the backbone of our economy and play a vital role in their communities. This new rapid loan scheme will help ensure they get the finance they need quickly to help survive this crisis.”
Under the scheme, businesses may apply for a loan of up to 25% of their annual turnover, between £2,000 and £50,000 (increased from the originally anticipated £25,000 cap). There will be no fees, interest or repayment due for the first 12 months and the Government will guarantee 100% of these loans, in a bid to persuade banks to agree to lend the money. The 100% guarantee is a welcome move and follows the approach in Germany.
The scheme is administered by the British Business Bank and will be delivered through a ‘network of accredited lenders’ with the 50+ banks already participating in the CBILS also offering Bounce Back loans (the full list of current accredited lenders can be found here). Businesses intending to apply for a loan under this scheme should approach the accredited lenders directly.
A summary of the Bounce Back Loan Scheme key terms and eligibility criteria is set out below
- Loan terms of up to 6 years
- No fees or interest due during the first 12 months
- No repayments due during the first 12 months
- Interest rate of 2.5% per annum for the remaining period of the loan
- The business applying for the loan:
- must be based in the UK;
- must have been established on or before 1 March 2020;
- must derive more than 50% of its income from its trading activity (except for charities or further-education colleges);
- must have been negatively affected by coronavirus; and
- must not have been an ‘undertaking in difficulty’ on 31 December 2019.
- Business not eligible for this scheme are:
- those business already claiming under CBILS (but those that have already received a loan of up to £50,000 under CBILS may transfer the loan to the Bounce Back Loan scheme until 4 November 2020);
- banks, insurers and reinsurers (but not insurance brokers);
- public sector bodies; and
- state-funded primary and secondary schools.
Grant-funded further education establishments are no longer excluded following a further change to the scheme announced within 24 hours of the initial details being released.
The new Bounce Back Loan scheme should help to bridge the gap faced by microbusinesses, and the 100% Government guarantee will ease issues normally faced by these business who are often less keen or less able to take on debt.
The key points we would note are:
- The application process – the Chancellor has told MPs that the online application process for loans under this scheme will be quick and simple, and banks will no longer require forward financials or business plans. This is perhaps evidence of a response to the previous criticism over the complexity of the CBILS application process.
- Timescale – it has been promised that loans will arrive within 24 hours of approval for most businesses. This is an ambitious deadline and the big question is whether the banks can make this tight timetable work in practice.
- Consumer Credit Act – loans of up to £25,000 to unincorporated businesses, sole traders and small partnerships will be caught by the Consumer Credit Act. However the FCA has indicated that it does not expect lenders to comply with the requirements to carry out a reasonable assessment of a borrower’s creditworthiness and affordability assessments before advancing the Bounce Back Loans. Further guidance from the FCA on the application of its rules to the Bounce Back Loans and the CBILS is awaited.
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