Bounce Back Loans: what you need to know

Just as the Government has been handing out money to businesses under threat as a result of coronavirus, so it has a number of loan-based programmes to keep struggling firms afloat.

In particular, the Bounce Back Loan (BBL) launched in the first week of May, and it’s specifically aimed at the small business, with monies being supplied by the banks.

BBLs have been very well received. According to data on smallbusiness.co.uk the banks loaned £3.3 billion on the first day, with more than 100,000 businesses applying, with an average loan size of £30,000.

By the first week in August, the Government released figures that stated that some 1.13 million BBLs had been agreed out of more than 1.37 million applications, to a value of £34.34 billion; the statistics show that more than 82% of applicants were successful.

But BBLs are not going to be around forever – the book to new applications closes on 4 November.

Defining a BBL

Few think that debt is a good idea; after all, it means another person or body has a hold over a business. However, for some, it is a form of funding that is actively courted – Apple is a big fan – which can provide working capital at very advantageous rates – especially in today’s low-interest world.

A BBL is a very specific thing in that it allows a business to borrow between £2,500 and £50,000 to a maximum 25% of its annual turnover during a six-year period. This compares very favourably to borrowing against reported profits (or losses).

Where a BBL comes into its own is that no interest is charged, and no repayments are made during the first year. For the remaining five years of the loan, interest is fixed at 2.5%, which is very low compared to a normal commercial loan; according to businessexpert.co.uk a commercial mortgage, for example, can cost between 2.25% and 18% plus arrangement fees. Credit card interest can be found with interest rates in the mid-20s. And overdrafts are technically repayable on demand.

On top of the low cost is the ability to repay a loan early without being levied any repayment charges. Further, there’s no requirement or need to offer personal guarantees to secure the loan.

All of this follows on from the Government backing the loans, and covering interest and fees for the first year. And all that is needed to apply for a loan is, in theory, basic business data, proof the business has been affected by coronavirus and detail on what the money will be spent on. The reality is that it’s a tick-box exercise.

Getting a loan

The scheme is open to all – sole traders, (sole) directors of limited companies and also those who are self-employed. But there is one snag – the business must have been going before March 2020, still running, and have been affected by coronavirus.

Other criteria are that 50% of income must be from trading, it’s not a business in difficulty as at 31 December 2019, it’s not in a restricted sector, and it’s not in receipt of another Government lending programme. All of the details are on the GOV.UK website, under “Apply for a coronavirus Bounce Back Loan”.

Seeking and obtaining a BBL doesn’t remove the ability of the applicant to apply for the Self-Employment Income Support Scheme or Universal Credit. Also, unlike the furlough scheme, directors and employees can carry on working in the business. And as an added bonus, it’s not taxable.

It’s worth noting that applicants, once approved, cannot top up or increase a BBL. Nor can they apply for a second BBL for the same business. Thought must, therefore, be given to the amount requested.

A natural question to ask is what a BBL can be used for? As per the rules, a few restrictions are in place. All the regime says is that “the business must confirm to the lender that the loan will only be used to provide an economic benefit to the business – for example, providing working capital, and not for personal purposes”. This is so wide and can therefore include investment, the cost of running a business such as bills, debts and employees. Directors could also take money as dividends. Or the money can be used as a buffer against income shock.

The reality is a BBL could be used to refinance expensive debt or even pay tax bills.

Where to apply

As to where to apply for a BBL, GOV.UK lists all of the currently accredited banks. All the usual suspects are there – HSBC, Lloyds, TSB, Barclays, Santander, NatWest, Royal Bank of Scotland and Bank of Scotland, plus The Co-operative Bank, Clydesdale Bank, Yorkshire Bank, Danske Bank, Ulster Bank and Starling Bank. Also, there’s Paragon, Capital on Tap, Arbuthnot Latham, Coutts and Metro Bank – noticeably missing is Nationwide and Monzo.

Clearly those who already bank with these accredited institutions are going to find life much simpler as they’re a known quantity. Those who want to get funding from these banks will have to open full (or feeder – “basic”) accounts if they don’t already bank there; they will also have to counter the hurdles placed in their way, such as anti-money laundering.

It’s also become apparent that the success of these loans had meant that many banks had closed to new applicants for the time being. The best bet might be to apply, if necessary, to a bank the owner is a personal customer of.

Due diligence

While limited companies need a separate and distinct business account, many sole traders use a private account. BBLs generally require separate business accounts and this may lead to the need to have a fee-bearing account; only a handful – including HSBC, Clydesdale Bank and Yorkshire Bank – will lend to existing personal customers.

But beware that having an account with a bank doesn’t guarantee success. As reported on a BBC Money Box podcast at the end of June, Starling Bank in particular – it was the bank mainly discussed on the programme and so this situation probably applies to all – was found to be rejecting 16% of applicants. That said, 94% of those approved by Starling Bank received the funds within 24 hours.

It’s just as important that applicants set their expectations accordingly – with such a volume of applications it can take time to progress from a waiting list to being granted (rejected) for a loan. Partly, this is down to press of business, but it’s also down to due diligence checks to reduce fraud.

Lastly, if a business is rejected by one bank, nothing prevents it applying to another, subject to the need to open a new account. But before it does, management should consider the reason it was rejected. According to a June survey conducted by MoneySavingExpert.com, it appears that limited companies stand a better chance of success compared to sole traders, that existing customers do better and faster than new customers, and that it was credit scores and credit checks that “scuppered applications for these ‘no credit check needed’ loans”. And it’s easy to see why – limited companies and those behind them tend to need to prove themselves in greater detail than a sole trader who may be operating below the radar with a personal bank account.

Downsides

It’s entirely true that a BBL is a very attractive proposition, and one that is backed by the Government. Even so, a BBL is still debt that must be repaid, with interest, if it’s kept for more than a year.

If a business doesn’t need the money and might be considered a spendthrift then it shouldn’t seek a BBL. It’ll cause more trouble than it’s worth.

And while the monies are backed by the Government in case of non-repayment, if it’s likely that the monies will just kick a problem further down the road then a BBL should also be avoided; while borrowers don’t have to give a personal guarantee, a soft credit search at the minimum will be recorded.