Bounce back loans – The clock is ticking

By Anita Jaynes on 14 October, 2020

Post sponsored by Purple Lime

By now, you will probably have heard about the Bounce Back Loan scheme, at least in passing. It’s one of the ways the UK Government is trying to support business owners during the pandemic. This is the most challenging time in many of our lives, and small businesses have been some of the worst hit throughout lockdown, and beyond. And as the pandemic continues longer than anyone expected, the Government has announced some changes to the scheme to help continue that support. While those measures might seem positive, there has been some interesting – and worrying – feedback from the industry. 

What is the Bounce Back Loan?

The Bounce Back Loan was first launched in April this year, as a way to allow small and medium-sized businesses to borrow money that is backed by the Government. Businesses could borrow between £2,000 and up to 25% of their turnover, with a cap of £50,000, from their bank. This loan is 100% guaranteed by the Government, and there aren’t any fees, capital or interest to pay for the first 12 months. After 12 months, interest is payable at only 2.5% per annum. 

By structuring the loans in this way, the Government could support the smaller businesses who may not have been eligible for the other types of support schemes being rolled out. The eligibility criteria for the scheme (which you can still apply for), are pretty simple. To apply, your business has to be:

  • Based in the UK
  • Established before the 1st March 2020
  • Adversely impacted by Covid-19

That’s pretty much it. Businesses from almost any sector can apply for the Bounce Back Loan, except for:

  • Banks, insurers, and reinsurers
  • Public sector bodies
  • State-funded primary and secondary schools

As long as you don’t fall into those categories and aren’t claiming support under one of the other schemes, then you can apply for a Bounce Back Loan from your bank. The application process was designed to be simple, and you weren’t even required to submit your small business accounts. However, more recent applicants are finding they need to provide more and more information to their bank to apply, possibly because banks are worried about defaults and fraud attempts, which is making the whole process take far longer – making the deadline extension seem not so generous. So far, over a million businesses have claimed a collective £38bn through the scheme, and we expect that to keep rising.

What are the Changes?

As we mentioned earlier, Covid-19 has had a more long-term impact than we thought it would, and this means businesses are still being impacted, still struggling, and still needing support. This has caused a lot of concern in the business community. As small business accountants, we have been working hard with our clients to offer them the best advice and support to guide them through this challenging time.

The Government recently announced two key changes made to the Bounce Back Loan, in order to keep supporting those businesses: 

Extension: The Bounce Back scheme will be extended, so the application deadline is now 30th  November. This gives businesses more opportunities to take advantage of the scheme, especially if they are only just starting to feel the strain and look for help.

Term Extension: There will also be an extension to the terms of existing Bounce Back Loans. If you have already received a Bounce Back Loan with 6-year terms, this can be extended to 10 years. The extension may be applied automatically, or you might have to apply for it, depending on your bank. If you make a new application, the 10 years will be automatic. This is great news for everyone taking on this loan.

That’s Great News for Small Businesses, Right?

In many ways, at least superficially, the answer is ‘yes’. The scheme extension provides a vital lifeline to those businesses who are only now beginning to feel the impact of Covid-19 on their trading. The loan term extension also makes the repayments more affordable, ensuring any fragile cash flows aren’t over-burdened as businesses begin to emerge from the economic slow-down. 

However, it’s not all the good news it appears to be.  As we mentioned above, we’re hearing that new applicants for the Bounce Back Loans are finding it much more difficult to access than earlier applicants. And what we want to know, is why?

Fraud, Failure & Shortage of Capital

The National Audit Office has warned that almost 70% of the £38 bn of loans extended under the scheme may actually be irrecoverable, due to business failure or fraud. The impact of this is that banks could end up being forced to write off £26 bn of loans – with the tax-payer footing the bill thanks to the Government guarantee. 

Not only that, but some of the alternative lenders are becoming over-subscribed for the ring-fenced capital they’re able to lend. For example, Coinster, an Isle of Man based lender, had £10m of capital available to lend under the scheme. Within 72 hours of launching, they had received £162m of applications – which meant disappointment for 1 in every 16 applicants.

The Impact on Small Business: This, of course, has an impact on small businesses. The main one being that of the 28 banks approved to lend under the scheme are either no longer offering it, or they are limiting applications to existing customers only – and even in those cases the application process is taking a lot longer and the acceptance rate is dropping. So if you’re unable to access a loan from your incumbent bank, and many lenders are only offering it to existing customers, surely it’s simply a case of opening an account at another bank?

Caught in the Perfect Storm: Unfortunately, no. The security checks that banks are putting in place to address their fear of fraud and failure, combined with the sheer volume of new small businesses looking to switch their accounts, means that there are real problems for valid loan claimants. Anecdotally, opening a business account with a new bank can take anywhere from 4-7 weeks, but because of these enhanced security procedures and extra information, this is taking much longer. And the bad news is that even if you do manage to successfully open an account with a bank that’s still lending under the scheme, access to the Bounce Back Loan isn’t a given. Only a small number of lenders are currently offering the scheme to customers who switch, and even then, some are operating ‘waiting lists’ for applicants. It’s fair to say that what was a fairly straight-forward process earlier in the year is anything but now.

At Purple Lime, we are recommending that any business owners who are thinking of applying for the loan do so, and get the process moving quickly. While the application deadline might be 30th November, the issues being experienced by a large number of businesses mean that the time taken to successfully secure a loan could cause many cash-strapped applicants to miss the deadline. The clock might be ticking a lot faster than we think on this one! Starting the application process now with your existing bank is the smart move. 

If your bank isn’t offering Bounce Back Loans at the moment, or you’ve been declined for the scheme, then we can help you look at alternative funding options, as well as some general cash flow planning to help you get through the pandemic in good shape. If you need any information or advice about the Bounce Back Loan, or just want to talk to some small business accountants how it would benefit your business, we would be happy to help. Just email, or call 01249 691 360 to chat with one of our team.