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Making the Government’s Recovery Loan Scheme work for you after the budget

28 October 2021

In this article Lawrie Chandler looks at financing schemes that have been supported by the British Business Bank and how they can be useful for smaller companies, particularly microenterprises, to support development of their business from a finance perspective.

Background on the government loan schemes and uses for businesses in Q4 2021

In March 2020 when the world was rapidly going into national lockdowns, companies of all sizes needed access to capital. In the UK the Government mobilised the UK’s banking infrastructure to allow lending that supported companies’ need for cash. From September 2021, lockdown has eased but some of those government backed financing options are still available and are seriously worth consideration if you’re a business seeking growth capital or looking at your financial position.

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, the directors and the owners of that business. The UK Government offered lenders an 80% guarantee on any defaulted loans, so lenders were more comfortable to lend to individuals and in extreme circumstances.

The British Business Bank were the main organisers of this scheme which came in two forms at the start of the pandemic; the Bounce Back Loans and the Coronavirus Business Interruption Loan Scheme (CBILS). These two forms of loans are no longer available, so we won’t revisit them.

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 December 2021 in the recent Autumn Budget) this loan is available and can be seriously attractive for any organisation that is eligible and/or seeking a competitive form of finance for their business.

Some of the main attractions of the Recovery Loan Scheme are:

  1. government-backed guarantee against the outstanding balance of the loan facility
  2. Because of the government guarantee, you usually get competitive interest rates
  3. No personal guarantees needed for loans up to £250.000

New conditions come into effect on 1 Jan 2022. These are:

  1. Maximum £2m cap per business (previously £10m)
  2. UK Government guarantee 70% (previously 80%)
  3. Exclusively for SMEs.

There is a platform of different lenders and 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 which reflects the fact that they are working with businesses whose risk profile they feel is higher. The Recovery Loan Scheme does not define the amount of interest a lender can charge, but 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%.

In which circumstances should I be looking at the Recovery Loan Scheme?

There are various circumstances when a firm may want to look at the Recovery Loan Scheme:

  • If you are an existing business with sales, gross profits and trading activities and feel that you need more working capital, that’s a situation where you could 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 your historical track record. Interestingly, it’s important to demonstrate of how you will be able to repay the funds going forward. Getting suitable financial forecasts will be key in this circumstance especially where the pandemic may have affected the trading trend of your business. So you need to demonstrate that you are confident of its recovery; you need to provide a compelling business case to secure 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 Start-up 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 is 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 start-up businesses if in their early stages at the discretion of the lender. It is a rather challenging method for seeking finance but it is available if you can demonstrate a strong case through your management accounts, financial forecasts, details of any assets in the business and a comprehensive business plan.

This article is designed to give a little bit of inspiration rather than the full ins and outs 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 in June 2022 (extended from December 2021) so you need to be ready to make an application soon. Speak to your accountant, Business Gateway contact to discuss this.

Even better, come along to my webinar on 4 November at 10.00am where I can answer all of your questions.  You can book your FREE place here: https://bit.ly/3FJRI8F

Edale is a business advisory business and regulated financial organisation with the FCA. They help individuals and firms look after financial assets.