Today is the day. After last week’s announcement from the Chancellor of the Exchequer, we will see the launch of the ‘Bounce Back Loan Scheme’. It looks like a good product, but apart from the snazzy name, here is what it gives business owners:
- A simple application process and access to funds within 24 hours
- Loans of 25% of turnover (subject to a maximum of £50k)
- A repayment holiday AND interest covered by the Government for 12 months
- The loan can be repaid over 6 years at a low rate of interest
- The loans will be guaranteed by the Government so no security should be needed AND the lender is protected
- There will be a network of accredited lenders who can provide these loans
At the time of writing this article (over my cornflakes on Saturday morning), there were still a number of key details to be finalised including: the wording needed for the one-page application, the interest rate once the interest-free period ends (currently the Government is looking at sub 3%). And some technical issues for the lenders around due diligence, The Consumer Credit Act and potential fraudulent applications. A potential pitfall for some SMEs could be the ruling that the business cannot have been ‘an undertaking in difficulty’ – more on this later…
We think it is a great initiative that should be able to get cash to SME owners quickly. We are not out of the woods yet though. Getting the loan agreed and money to customers within 24 hours is a big challenge. The application process and all the systems need to be robust. However, the launch of the ‘furlough scheme’ went very well and shows what can be done in times of need.
In the longer term, we do need some clarity on what will happen with loans that cannot be repaid. The loan sits with the lender and if the customer defaults, the lender will start the collection process. At some point the lender will need to rely on the Government’s guarantee – will that be it? The cost to the Treasury could be enormous and this will need to be recouped.
The banks have been quick to get the details of scheme onto their websites. As the scheme was only announced a few days ago, the information is, pretty much, headlines only. All the sites point out the rules for the scheme including (and I said we’d get back to this) the fact that ‘an undertaking in difficulty’ cannot apply. The definition of ‘an undertaking in difficulty’ is contained in Article 2 (18) of the Commission Regulation (EU) no. 651/2014 of 17 June 2014 and most websites just quote the legal definition. It will make your head hurt so we suggest you speak to someone who can give you a layman’s version of the rules. The Pro-actions team can help with this.
Clearly, once the lenders can share more detail, SMEs will be in a better position to apply for funding, and we will be well-placed to help them where needed.
What should you do next?
We believe this is a great product – hats off to the Chancellor and his team. The proof of the pudding will be the delivery. One thing to remember is, this is a loan from a finance company and whilst the application process might be streamlined, the borrower will be the first port of call if you can’t start paying it back in 12 months’ time. The Government guarantee is there to protect the lender.
We don’t know the questions that the lenders will ask on the application (they don’t know them all right now), but we do know what a good loan application looks like and can help you work out what support you need. If you need any help preparing your application, or would like some advice on your cash flow in these difficult times, get in touch…