What funding is available under the Bounce Back Loans scheme?
Launching on the 4th May, the Bounce Back Loans scheme will be open to small and medium sized businesses across the UK and offer loans of up to 25% of turnover. The smallest loans offered will be for £2,000 and the largest £50,000.
The loans will be offered through accredited lenders, with the Government providing a 100% guarantee. The recipient will not pay any fees and no interest shall be applied to the capital sum for the first 12 months. Loan terms will be up to 6 years and no repayments will be due during the first 12 months. It has not been confirmed what the interest rate will be after the first 12 months, but the Government has said that it will work with lenders to ensure that this remains low.
Which businesses are eligible?
You can apply for a loan if your business:
- is based in the UK;
- has been negatively affected by coronavirus; and
- was not an ‘undertaking in difficulty’ on 31 December 2019
The Government has said that there is no limit on turnover, no need to show proof of turnover and no viability test - but some fraud checks will have to be completed.
The following organisations are not eligible to apply:
- banks, insurers and reinsurers (but not insurance brokers);
- public-sector bodies;
- further-education establishments, if they are grant-funded; and
- state-funded primary and secondary schools
How can I apply?
The scheme will be delivered through the British Business Bank and their network of accredited lenders. The online application process will open on Monday 4 May.
I am receiving other kinds of aid to help respond to COVID-19, can I still benefit from the bounce back loan scheme?
Businesses cannot apply if they are already claiming under the Coronavirus Business Interruption Loan Scheme (CBILS). However, a business which has already received a loan of up to £50,000 under CBILS and would like to transfer it into the Bounce Back Loan scheme, can arrange this with their lender up until 4 November 2020.
How do these loans differ from previously announced loan schemes?
These loans are 100% backed by the government, unlike the CBILS and the Coronavirus Large Business Interruption Loan Scheme (CLBILS) which were only partially guaranteed. It is anticipated that businesses applying to the Bounce Back Loans will see a higher success rate as lenders face a less risky prospect. In a similar vein, companies are not required to pass a viability test to qualify for the loan. The changes were designed to make it easier and faster for businesses to access the cash.
The borrowing limit is, however, lower (with a maximum of £50,000 rather than £5 million under CBILS and £50 million under CLBILS). These loans are therefore aimed at smaller to medium sized firms. The interest and fees for the first 12 months are paid by the government for both CBILS and Bounce Back Loans however there has been speculation that the interest rates for CBILS will increase after the first 12 months, which the government has stated it will work to prevent with Bounce Back Loans.
Have any changes been made to other Government measures to support businesses during the Coronavirus pandemic?
The Financial Times has reported that the Financial Conduct Authority ("FCA") has amended a credit-worthiness test to allow funding to be provided more quickly.
Consumer Credit (CONC) rule CONC 5.2A is part of the standard criteria lenders must apply when considering loan applications under the Government's CBILS initiative. The FCA's changes are time limited and expected to also extend to Bounce Back Loan scheme too. Other compliance requirements will still need to be considered in order for a loan to be approved.
This move has coincided with the European Commission on 28 April announcing a new banking "package" intended to create flexibility within the EU's financial sector to ensure that lenders can continue to lend to businesses and individuals. Amongst the measures contained in the package is an an Interpretative Communication on the EU's accounting and prudential frameworks, encouraging lenders and supervisory authorities to use flexibility within accounting and prudential rules to support citizens and firms, particularly small and medium-sized companies. For example, public and private freezes on loan repayments (in accordance with guidelines published by the EBA on 2 April) are encouraged and responsible actions from banks (such as refraining from dividend distributions to shareholders) are advised.
Also announced is a proposal for a Regulation to implement several targeted “quick fix” amendments to the Capital Requirements Regulation. The changes are designed to maximise the capacity of credit institutions to lend and to absorb losses related to the Coronavirus pandemic. The amendments include: adapting the timeline of the application of international accounting standards on banks' capital; treating more favourably public guarantees granted during the Coronavirus crisis; postponing the date of application of the leverage ratio buffer and modifying the way of excluding certain exposures from the calculation of the leverage ratio.
For further information on the package, please see the Q&A published here.
The FCA's amendment and the Commission's new package are an important step in ensuring that funds are quickly distributed. It comes at a time when there has been criticism of banks distributing public funding and also of certain parts of the State aid rules, including the undertaking in difficulty test applied under the EU's Temporary Framework (which is the legal basis for the UK's "umbrella" scheme adopted in early April).
Conclusion
The Bounce Back Loans initiative is the latest measure to be announced by the Government in reaction to the Covid-19 pandemic. Perhaps significantly, however, it is apparently the first which is outwardly aimed at recovery and renewal more than survival. We should expect to see the focus shifting very much in this direction with future government initiatives being developed. Although public funding will be welcomed by those with liquidity issues, it remains to be seen whether a measure which increases the debt of a company will be popular. It may be that the other packages of support available to businesses (including business grants, tax deferrals, and the job retention scheme) are more effective in helping businesses keep trading.
DWF's award winning Public Sector law team has market leading experience of advising Central Government and Regional and Local Authorities as well as grant beneficiaries on State aid compliance and administering grant schemes.
