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When the pandemic took hold in March 2020, the UK government promised to provide up to £330bn via government backed schemes in the shape of the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Future Fund.
The Future Fund closed at the end January 2021. The CBILS, BBL and CLBILS schemes closed to new applications at end March 2021. During their short lives, over £23.28bn was advanced to UK businesses via CBILs, £46.53bn via bounce back loans, £5.30bn via CLBILS, and £1.12m of convertible loans were issued via the Future Fund*. Significant sums indeed, but a long way short of the £330bn the government had earmarked. Critics point to the success rate for CBIL applications: only around 50% of applications were successful, suggesting that the credit risk assessment criteria applied by the approved body of lenders participating in the schemes was too demanding.
What is also striking is the growing number of successful applicants looking to repay their scheme loans early. There was a perception when the schemes were launched that they represented ‘low hanging fruit’ – quick and cheap finance for owners worried about the impact of the pandemic on their business. A year or more on, and with interest rates remaining low, some of those scheme facilities no longer appear cheap money and, for businesses whose worse fears did not materialise, it is questionable as to whether they needed the money in the first place.
Against that backdrop, the Chancellor announced a new scheme – the Recovery Loan Scheme (RLS) – which opened on the 1st April this year, set to run until the 31st December 2021. As with the previous schemes, you need to demonstrate that Covid-19 has impacted on your business. You can apply for finance between £25,001 and £10 million, for a term of up to 6 years. Lenders participating in the scheme receive a government guarantee of up to 80% of the funds they advance. Unlike the previous schemes, the government does not pay the first 12 months’ interest or set-up fees (an attractive selling point for those earlier schemes). However, there is no minimum annual turnover requirement for a RLS applicant (with CBILs you had to demonstrate minimum annual turnover of over £200,000 which ruled out many recent start-up businesses). If you have already received funding via one of the earlier schemes, the RLS is still open to you, although amounts borrowed under previous schemes may limit the amount you can borrow now via the RLS.
As with previous schemes, RLS funding can be made available via term loan, overdraft, asset finance or invoice finance facility, to suit your business. The real difference between the RLS and its predecessors is that the RLS is specifically purposed to help businesses to recover and grow, as the country emerges from lockdown restrictions. An RLS loan can be used for any legitimate business purpose; marketing costs, repurposing costs, hiring of staff, managing cashflow and acquisitions (e.g. equipment, premises or even to help buy another business). Where the earlier schemes focused on funding to fill gaps in cashflow caused by a slowing or cessation of trade, this is a more optimistic scheme, aiming to help business owners plan a brighter future.
It remains to be seen whether UK businesses will take up the scheme, and how it will fare if further lockdowns are announced (for instance, if infection rates start to rise again or new variants prove resistant to the vaccines). We also need to see how the participating lenders will apply and price the scheme. The British Business Bank (the body tasked with accrediting lenders to participate in the scheme) states on its website that “a key aim of the RLS is to improve the terms on offer.., but if a lender can offer the choice of a commercial loan on better terms…they should do so”, an acknowledgment that some applicants may find they can obtain the right funding for their business requirements, at a more attractive rate, from non-scheme loan products available in the wider market.
Some of the participating lenders have already published fixed pricing for their RLS facilities. Other lenders state that the margin will be assessed and ‘tailored’ for each applicant. Judging by the number of businesses already considering repaying their CBIL funding, would-be borrowers may benefit from discussions with more than one lender about their current and longer term funding requirements in order to establish what might be the appropriate option, in terms of cost, duration and purpose, before taking an RLS facility. Perhaps the message is therefore to check before selecting the low hanging fruit – there may be a better deal higher up the tree.
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*Note: these are approx. figures as at 21 March 2021 and do not take account of applications received between that date and 31 March when the schemes closed.