Grab your chance to bounce back
Wednesday, September 23, 2020
The fact that coronavirus should be a once-in-a-lifetime pandemic is irrelevant; it’s with us and has caused global carnage leaving governments around the world struggling to cope.
Covid has become a chronic long-term ailment afflicting us all. Despite ‘damned if you do and damned if you don’t’ criticism, the UK government has in reality gone further than many others around the world. Its programmes may have gaps and omissions, but what the government has put in place came in days, not the usual years.
The Coronavirus Job Retention Scheme has occupied many a conversation, but another scheme, the Bounce Back Loan (BBL) could prove just as important to the survival of businesses. Many will be aware of it, but not all understand its power and that, just as importantly, it’s due to close to new applicants on 4 November unless given a last-minute reprieve; those that wish to take advantage of it need to act quickly.
BBLs have gone down well. Take up was quick with some £3.3bn loaned to 100,000 applicants on launch day back in May. And as of 16 August, government figures show that 1.2 million BBL’s had been agreed out of 1.4 million applications to a value of £35.5bn. The statistics also show that more than 81% of applicants were successful and the average loan size was £30,000.
But the creation of the BBL was not without pain. Ian Cass, managing director of the Forum of Private Business, tells how the BBL was borne out of frustration with the government’s Coronavirus Business Loan Interruption Scheme (CBILS): “CBILS loans were a good idea, but the government relied on the wrong people to deliver them: the big banks who don’t value small business and who have reduced business support and closed branches for years.”
He says that their lack of knowledge of their own customers and an inability to support them led to long application processes and many small businesses were rejected. “Once their bank had rejected them,” says Cass, “applicants didn’t realise they could have tried alternative providers who could have been more interested and granted the loan.” He adds that while alternative providers were another solution it took a long time to get them involved and the size of their financial reserves was an issue in some cases.
And Henry Ejdelbaum, managing director of ASC Finance for Business, agrees. He says: “One needs to look at the launch of the Bounce Back Loan scheme in its context. Originally, the CBILS scheme came in for some criticism, with some people saying that the process took too long for businesses to receive the funds, and that the application criteria were too strict.
“The BBL scheme was introduced with money released quickly but little to no underwriting on applications – it is a difficult balance to get right.”
Defining a Bounce Back Loan
Unusually with a government-backed programme, a BBL is very easy to define. In essence, a BBL allows a business to borrow between £2,500 and £50,000 over a six-year period to a maximum 25% of its turnover. There’s no interest or repayments required during the first year and the scheme demands no credit check, personal guarantees or early repayment fees. And as if to sugar coat the scheme further, interest for years two to six is fixed at just 2.5% which is very low compared to a normal commercial loan – or any other type of loan for that matter.
Any business can apply for a BBL irrespective of whether it’s a sole trader or limited company, provided they meet the eligibility criteria: the business must have been in existence prior to March 2020, still be trading and have been adversely affected by coronavirus. Beyond this, at least 50% of income must come from trading and it must not have been in difficulty on 31 December 2019. Lastly, the applicant business cannot be in a restricted sector such as banking and it cannot be in receipt of another government lending programme.
All of the terms are on the gov.uk website, under Apply for a coronavirus Bounce Back Loan (it redirects to the British Business Bank).
While the scheme sounds great in principle, Cass does have some worries which could just kick problems further down the road. For the smaller business – the key target of BBLs – he notes that “having failed to deliver the loans in the numbers expected the big banks argued for the smaller Bounce Back Loans… which are 100% government backed. The problem is that they are now being handed out like Smarties, sometimes to inappropriate businesses for inappropriate uses.”
And this leads Cass to make another very valid, but short, observation in relation to how BBL cash can be deployed – it can be used for “almost anything”.
And the government’s website proves the point. It specifies few terms apart from “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 statement is very wide and means that a BBL can be used for investment, the cost of running a business such as tax and other bills, debts and employees.
But there is another concern for Cass: the situation of the larger, but still small, firm – businesses that need loans in the region of £80,000-£100,000. As he explains, “they are too big for grants and have more ongoing overheads with less cashflow; they are left with no option other than to take out normal high interest loans or cut costs and cut staff”.
Nevertheless, BBLs are available and it’s notable that obtaining one 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.
But there is a warning for applicants: consider carefully the amount sought since once approved, a BBL cannot be topped up, increased or another BBL applied for. This, reckons Cass, means that firms needing extra cash could be left looking at alternative forms of funding “and the issue with information and education around this is that it’s so poor so many small businesses get the wrong funding, from the wrong source and use it in the wrong way”.
Edjelbaum thinks along the same lines. He explains that there may be other options available such as working capital loans, peer-to-peer finance, asset finance, or invoice discounting. As he says, “there is no one-size-fits-all approach to business finance, and businesses should ensure that they speak to a specialist in commercial finance to ensure they end up with the right finance for them”.
Avoid debt if possible
Despite the utility of a BBL and the short window to make an application, Cass would nevertheless advise any small business owner to avoid taking on debt if they possibly can. Instead, he suggests using “free time you have during Covid-19 to really analyse your business; are there any costs you can cut? Look at this in detail and be ruthless when doing so”.
He adds: “Then look at how you can increase your business, what ideas can you put into action which will increase sales, footfall, customers served, new markets, and so on.” Only when you have exhausted all of those options does he advocate taking out a loan.
Ejdelbaum takes a slightly different tack. He cautions that firms “should only apply if the business has been ‘adversely impacted by the coronavirus’. If it hasn’t been adversely impacted, then there is a risk that your application might be fraudulent.” He also points out that where a BBL is taken and the business has a further funding requirement in the future, the costs of servicing the BBL may impact how lenders view any future application.
Where to apply
BBLs are available from a multitude of banks, which are listed on the government’s website. All of the expected institutions are there together with names – the challenger banks – that are less well known.
While it’s possible to apply to any bank on the list, it follows that an applicant’s present bank will be the best bet. Institutions where a business doesn’t bank will require the opening of, at the minimum, a feeder account.
Problems may arise for those who operate as a sole trader using a private bank account since BBLs need a separate, often fee-bearing, business account. A few such as HSBC, Clydesdale Bank and Yorkshire Bank will lend to existing personal customers.
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 or rejected for a loan. Rejection isn’t a bar to making an application to another bank but firms should think why the rejection was made; a survey conducted by Moneysavingexpert.com in June found that limited companies fared better compared with sole traders and that poor credit scores “scuppered applications for these ‘no credit check needed’ loans”.
On this Cass thinks applicants are “usually rejected because big banks don’t want small business customers”. His advice is simple: “Shop around and use the British Business Bank site to find alternative providers.” That said, he says “you shouldn’t be applying for a BBL if you don’t need one, but a £50,000 loan at 2.5% interest will tempt many to do so. Heaven forbid, perhaps replacing their existing high-interest finance by paying it off with the BBL.”
But if a firm does apply for the money, and doesn’t have any immediate plans to use it, good advice should be obtained on where to store it.
And lastly, for those with funding requirements that go beyond the cash a BBL can offer, Edjelbaum highly recommends engaging a professional advisor to assist with any finance application. His reasoning is simple, and he cites a survey by the National Association of Commercial Finance Brokers “which highlighted that a CBILS application was 33% more likely to be approved by a lender if it went through a commercial finance broker.”
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.