On Monday 4th May 20, a further financial initiative was launched by the government as part of it’s continuing efforts to support small businesses through the Coronavirus crisis.
The Bounce Back Loans provide 100% government guaranteed loans designed as a springboard to assist those businesses currently losing revenue and suffering disruption as a result of the COVID-19 outbreak.
So what are the key features of the scheme?
- Loans are available to all businesses up to a maximum of 25% of their turnover
- Loan amounts start at £2,000 up to a maximum of £50,000
- Loans are available from 4th May 2020 – 4th November 2020
- For the first 12 months the government will cover the interest payments only
- Businesses will not need to make their first capital repayment (to reduce the base loan value) until month 13
- The interest rate is set at a flat rate of 2.5%
- The Loan term is 6 years, but you can repay earlier
- No personal guarantees are required
- No guarantee fees are permissible
- Businesses must have been established and trading before 1st March 2020 and 50% of income should come from trading activities; it should also not operate in a restricted sector
- Businesses must not have been in financial difficulty on 31st December 2019 or in any bankruptcy or liquidation proceedings at the time of making their application
- Businesses must not have a Coronavirus Business Interruption Loan (CBILS) loan unless the Bounce Back Loan will refinance this in full
In reality what does this mean?
The loans provide access to vital funds for businesses who need help to make it through the crisis and offers the banks protection against businesses defaulting on loan repayments. It is important to remember with that being said, businesses remain fully liable for the debts they take on and loans are not right for every business.
Information hasn’t really been given on the British Business Bank website about the turnover the loans are based on however after looking around on some of the accredited loan partners websites, many are asking for annual sales figures from 01st January 2019 – 31st December 2019 and will accept estimated figures if your accounts have not yet been finalised. For businesses with less than 12 months trading history, again estimates can be used being mindful of the current economic downturn.
The form for making an application is short and simplified and no additional financials such as cash flow forecasts required to make the application, however individuals may be asked to provide copies of their self assessment tax return. Businesses are advised to approach their own lenders as they will have a greater understanding and visibility of how the business operates. Acceptance does remain the decision of lenders so there is a chance your business may not be accepted, this does not however mean you cannot try elsewhere.
Business must also be viable. This means they must not currently be undertaking any liquidation or bankruptcy procedures and must not have been a business in difficulty at the end of December 2019.
Businesses in certain sectors are also excluded including Credit Institutions, Insurance Companies, Public-Sector Organisations and State-funded primary and secondary schools.
What else should be considered?
Businesses should always consider whether a loan is the right option for them, other finance solutions such as overdrafts may be a more suitable short term solution. Current cashflow, future liabilities and a thorough review of the business should be undertaken before any decision to take on new finance is made.
To really understand current circumstances, businesses should collate information on the following key areas:
- Expected and Outstanding Income
- Day-to Day Running Expenses
- Future Financial Commitments
Armed with this information, a simple cashflow forecast can be created using due dates of invoices for both customers and suppliers and factoring in those expenses that occur regardless of whether the business is operating such as insurances, heat and lighting costs before finally adding any new loan repayments into the mix. This simple exercise will provide a good indication of your current ability to meet both current liabilities and spot any pinch points in the future when considering additional funding methods.
Business also have access to further reliefs in the form of the Coronavirus Job Retention Scheme, deferred VAT payments and Self Assessment liabilities.
Source: British Business Bank