In March 2020 when the world was rapidly going into national lockdowns companies of all sizes needed access to capital. In the UK the UK government mobilised the UK’s banking infrastructure to allow lending that supported companies need for cash. From September 2021 we are now in a different position but some of those government backed financing options are available and are seriously worth consideration for any business seeking growth capital or looking at their financial position.
This article looks at financing schemes that have been supported by the British Business Bank and how they can be useful for smaller companies particularly micro-enterprises to support development of their business from a finance perspective.
First pandemic government
The government announced a series of grants for business at the early stages of the pandemic but the main form of financing was through loan guarantees. When a bank makes a decision about whether to lend to a company they are making a risk judgement on the company, directors and owners of that business. The UK government offered lenders an 80% guarantee on any defaulted loans therefore lenders were more comfortable to lend to individuals and in extreme circumstances.
The British Business Bank with the main organisers of this scheme which came in two forms at the start of the pandemic these were the Bounce Back Loans and Coronavirus Business Interruption Loan Scheme (CBILS). These two forms of loans are no longer available and the merits of them we shall not revisit.
Restructured government lending scheme
The emergency funding initiatives outlined above have now been replaced with the Recovery Loan Scheme. From April 2021 until June 2022 (extended from Dec 2021 in the Autumn Budget) this loan is available and can be seriously attractive for any organisation that is eligible and/or seeking competitive form of finance for their business.
Some of the main attractions of the Recovery Loan Scheme are:
- government-backed guarantee against the outstanding balance of the facility
- Because of the government guarantee your usually get competitive interest rates
- No personal guarantees needed for loans upto £250.000
New conditions come into effect on 1 Jan 2022. These are :
- Maximum £2m cap per business (previously £10m)
- UK Government guarantee 70% (previously 80%)
- Exclusively for SMEs.
There is a platform of different lenders and we feel tiers of lenders. The British Business Bank website has a list of their accredited lenders to the Recovery Loan Scheme. The alternative lenders charge a higher level of interest rate and usually reflect they are working with businesses who’s risk profile they feel is riskier. The Recovery Loan Scheme does not define the amount of interest a lender can charge, just with the government guarantee this usually manifests itself in lower interest rates because of the protection to the lender. The Recovery Loan Scheme interest rates that are charged are market based and are dependent on the lenders willingness and higher interest rates can be higher for certain categories of business or profile of businesses. Under the scheme interest rates are capped at 14.99%.
What circumstances should I be looking at the cover loan scheme?
There were there were various circumstances when a firm may want to look at the Recovery Loan Scheme. Below a few examples that are designed to help provide some inspiration for your business.
- If you are an existing business with sales, gross profits and trading activities and feel that you need more working capital there were situation to borrow. The lender in a Recovery Loan Scheme application will actually look at affordability for your business, so it’s important to prepare suitable financial information with regard to historical track record but interestingly and importantly a demonstration of how you may be able to pay the funds going forward. Getting suitable financial forecasts will be key in this circumstance especially whereby the pandemic may have affected the trading trend of your business but you are confident with a gun to its recovery and can provide a compelling business case for the loan. And a clear path of affordability and repayment of the loan.
- Many businesses when they start out use the fantastic start up loan scheme. The startup loan scheme is a personal loan of up to £25,000 charging an interest rate of 6%. If your business is now successfully operating and may be in the form of a limited company you may wish to refinance any remaining start-up loan if you find that the Recovery Loan Scheme interest rate is lower. Additionally, if you have lower repayments any released additional cash could be beneficial to recycle in the business to improve your trading and profitability.
- The recovery loan scheme can be used by startup businesses if in their early stages at the discretion of the lender. they say is a rather challenging method for seeking finance but is available if you can demonstrate a strong case through your management accounts, financial forecasts details of any assets in the business and comprehensive business plan.
This article is designed to give a little bit of inspiration rather than the full in’s and out of the Recovery Loan Scheme. The uses of these funds can be transformational for businesses that need working capital or investment and have got a solid proposition with suitable documentation to back that up. The Recovery Loan Scheme currently is forecast to close on the 31st of December 2021 so to plan and be ready and make an application needs to be happening rapidly. Speak to your accountant, growth hub contact or access to finance adviser for some assistance understanding how the Recovery Loan Scheme could assist your business.
Edale is a business advisory business and regulated financial organisation with the FCA. They help individuals and firms look after financial assets.