On 31 March 2021 financial support by the Government for business through the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and the larger business counterpart, CLBILS, ended.
As of 6 April 2021, all replaced by the Treasuries new Recovery Loan Scheme (RLS) which runs until 31 December 2021.
Since the commencement of the pandemic last year, an extra £75bill of debt has been raised by business making almost 3m applications and receiving 1.6m new banking facilities. £45bill of this through the BBLS to small businesses with <£1m turnover and almost 40% of that with <£100k turnover. This theme of smaller businesses benefiting continues with 80% of the £24bill CBILS borrowed by businesses with <£5m turnover. These are significant sums.
To put things into context at the time of the 2007/8 banking crises the national debt cranked up to 80% of GDP. At the end of January 2021 public sector gross debt was 100.6% of GDP, a level last seen in the post war 50's. So is the financial support party now well and truly over.
The new RLS initially makes attractive headlines with Government guaranteeing 80% of the maximum loan value of £10m. This is available to all manner and size of businesses for "any legitimate business purpose", stressing that this includes investment for expansion and growth. The repayment term is dictated by the type of lending, 3 years for overdrafts and invoice finance facilities and 6 years for loans and asset finance facilities. Lenders can however require personal guarantees from directors (with security) for borrowing in excess of £250k. The capped interest rate of 14.99% also far less appetising.
The new reality is that obtaining a loan under the RLS will bare no resemblance to the ease of the CBILS procedure and certainly not the BBLS loan process. The current accredited lenders for the RLS (see British Business Bank website for list) will apply more traditional lending and credit criteria in assessing loan applications. So affordability, business plans, accounts, cash forecasts, liquidity ratios, covenant strength, sector and regulatory issues amongst other things will likely be considered and tested.
Additionally, sizable commercial considerations may also affect appetite to lend under the RLS notwithstanding it is 80% Government guaranteed. Especially so for those lenders who have put out sizable sums under the C&B BILS as their thoughts now turn to collecting that debt. In the Office for Budget (OFB) borrowing forecasts for year ending March 2021 it assumes an estimated £29.5bill debt write off for COVID lending schemes.
So to be clear, it is already budgeted by the OFB that c.40% of all COVID support funding is bad debt. Irrecoverable.
Under prior Government loan guarantee schemes banks will be fully conversant with how difficult and prolonged a process it is to get reimbursed by Government, even if the paper work is meticulous. Let alone money leant under new and hastily created schemes during a pandemic.
Consequently some traditional bank appetites will inevitably be dampened and lending tests for the RLS hardened creating the prospect of a liquidity gap, but step up challenger banks, PE funds and other lender/investors. There still seems plenty of that money about, but at what price.
No matter what your need or preferred route to money now is, what is clear is that it will be harder to obtain bank financial support through the RLS. So as part of best practice financial planning, now more than ever and certainly since the second world war, any funding request needs to be thoroughly and professionally prepared. Probably also wise to be first in the queue.
“As we safely reopen parts of our economy, our new Recovery Loan Scheme will ensure that businesses continue to have access to the finance they need as we move out of this crisis.” Rishi Sunak, The Chancellor of the Exchequer