Despite the Coronavirus Recovery Loan Scheme coming to effect this month, 58% of SMEs in need could be excluded. What does this new scheme mean for your business?

Applications for the £75bn Coronavirus Recovery Loan Scheme (RLS) opened on 6 April 2021. This new covid-19 funding programme is aimed at supporting British businesses affected by the pandemic and is available to companies that have already used other loan schemes like the Bounce Back Loan or Business Interruption Loan launched in 2020. 

 The Coronavirus Recovery Loan Scheme will operate until 31 December 2021 and is accessible for businesses that can demonstrate they have been materially affected by Covid-19. 

While there are no turnover restrictions in place, business that have already borrowed from any of the other coronavirus loan schemes may find that the amount borrowned under the Coronavirus Recovery Loan Scheme will be limited. 

How the Coronavirus Recovery Loan Scheme works

Available lenders

The Coronavirus Recovery Loan Scheme will initially be available through a number of lenders accredited by the British Business Bank, which is adding new lenders as they are accredited. 

19 accredited lenders include:

  • Aldermore
  • Arbuthnot Latham
  • Bank of Scotland
  • Barclays
  • Clydesdale Bank
  • Danske Bank
  • Ebury
  • HSBC
  • Lloyds Bank
  • NatWest
  • OakNorth Bank
  • Paragon
  • RBS
  • Santander
  • Scana Financial Services
  • Secure Trust Bank
  • Skipton Business Finance
  • Ulster Bank
  • Yorkshire Bank

The Coronavirus Recovery Loan Scheme is aimed to improve the terms on offer to you, which means that lenders are obligated to offer you a commercial loan on better terms if they are able to do so. 

Types of finance

A lender can provide up to £10m as one of the following facilities:

  • Term loan
  • Overdraft
  • Invoice finance
  • Asset finance
  • Guarantees

This scheme provides lenders a government-backed guarantee against the outstanding balance of the facility, but borrowers are liable for 100% of the debt.

Lenders will not accept personal guarantees for loans of £250,000 or less.

It is at the lenders discretion to take personal guarantees for amounts over £250,000. The maximum amount that can be covered under the scheme is capped at 20% of the outstanding balance of the facility after the proceeds of business assets have been applied.

The scheme is capped at a total loan facility of £10m per business (maximum £30m per group). Minimum facility sizes start at £1,000 for asset and invoice finance, and £25,001 for term loans and overdrafts.

The annual effective rate of interest, upfront fee and other fees cannot be more than 14.99% under this scheme. Please note that no personal guarantees can be held over principal residences. 

All applicants are subject to standard credit, fraud, Anti-Money Laundering (AML) and Know Your Customer (KYC) checks by lenders, which may vary between lenders. Short-to-medium-term impact on finances may be overlooked by lenders due to the pandemic. 

Evidence to provide lenders

Applicants for this scheme will need to provide the following evidence that they are able to repay the loan:

  • Management accounts
  • Business plan
  • Historic accounts
  • Details of assets

Response from the business community

Chancellor Rishi Sunak said that the new Coronavirus Recovery Loan Scheme will ensure that businesses continue to have access to the finance they need as we move out of this crisis.

To date, the government’s emergency loan schemes have supported more than £75bn of finance for 1.6m British businesses. The latest loan scheme is part of the government’s £350bn support package which has included the furlough scheme and grants and tax deferrals.

However, Todd Davison, MD of Purbeck Personal Guarantee Insurance, warns that many SMEs could find themselves excluded from the Recovery Loan Scheme.

The Office for Budgeting Responsibility is forecasting that £12 billioni will be advanced under the Recovery Loan Scheme, however, Purbeck Personal Guarantee Insurance is highlighting that this is less than 20% of the funding provided under the BBLS and CBILS precursors over the last 12 months with approval rates for the Recovery Loan Scheme likely to be similar to the levels seen with CBILS at 42%.

”Access to the Recovery Loan Scheme will be dependent on stringent affordability checks and any existing use of CBILS/BBLS will be taken into account for the purpose of the “business maximum amount” says Davidson.

This could exclude many SMEs from eligibility. Currently, the scheme can only be accessed through 19 accredited lenders, plus fees and interest will be incurred from day one.

“The Recovery Loan Scheme is a welcome move but it is an entirely different proposition to the Government backed schemes that went before, with much greater emphasis on affordability. This will leave some of the most severely impacted businesses such as those operating in retail, travel and hospitality, out in the cold,” he adds. 

”At this stage, with just 19 lenders accredited under the scheme compared to over 100 offering CBILS, there will be less choice for SMEs until more lenders come on board. Also, of the lenders already accredited under the scheme most are banks and likely to favour existing deposit holders.” 

The demand for finance will ramp up as the economy and general trade opened up from 12 April 2021, and businesses may wish to take on finance to help accelerate growth and smooth working capital cycles with their customers and suppliers. ”We anticipate as a result, many firms unable to access the Recovery Loan Scheme will start looking at alternative finance options which are highly likely to require Personal Guarantees as security for the lender.”

“It is vital SMEs go into any new finance agreements with their eyes wide open to the risks of signing a personal guarantee, and pre-emptively taken out personal guarantee insurance. This ensures that up to 80% of the risk is covered, offering a business owner or director protection from the potential loss of their personal assets,” Davison warns.

”This peace of mind will allow them to focus more fully on rebuilding their business and exploit the growth in business and consumer confidence with the continued roll out of the UK vaccination programme.”

Repayment looms as a concern

For Simon Dolan, founder of the Fighting Back for Business Campaign, businesses up and down the country have experienced extraordinary pressures and losses due to the Government’s ”shambolic pandemic response”, with many unable to trade since March 2020.

”We hoped that the Chancellor would offer up a desperately needed lifeline for SMEs by scrapping repayments on Government-backed business loans. Once again we have been disappointed,” he says. 

“The Chancellor has announced yet another Recovery Loan Scheme to replace the utterly destructive Bounce Back Loans and Business Interruption Loans schemes when they come to an end.”

”This announcement represents nothing but lip-service, and will do little to alleviate the immense economic pressures SMEs are under.”

The first step towards a thriving economy post-coronavirus hinges on businesses still being open and not weighed down by looming loan repayments, Dolan warns. ”The chancellor’s failure to recognise this is likely to lead to a new tidal wave of insolvencies and business failures this year. Not a single business would have wanted to take out covid business loans, and many did so under the assumption that they would be trading once again within a couple of months, not still waiting for clarity and certainty a year later.”

”On top of this, Sunak also announced that he will raise corporation tax by 33% - from 19% to 25%. Business are already facing a decade of crippling loan repayments and now this ludicrous tax increase will only prolong their struggles and stifle their recovery.”

If the government doesn’t step up, then struggling small and medium enterprises will disappear, he adds.

Independent research published by SME loan company, Reparo Finance, highlights that the majority of SMEs are still struggling as a result of the pandemic, with 85% of SMEs that have applied or started an application for the Coronavirus Business Interruption Loan Scheme (CBILS) still in need of financial support.

While the CBILS has had some success, with just over half (52%) of SMEs that have applied for the CBILS securing funding, concerns around eligibility (23%) and the application process being too time consuming (22%) are the main barriers to SMEs accessing the scheme.

“The research highlights that while support to date has had some success, much more support is needed to help ensure viable businesses have a future,” says Steve Richardson, Sales Director at Reparo Finance.

“The onus is on the Government, banks and other financial partners such as loan companies, to help ensure they make every effort to help businesses stay afloat.”

Many of the SMEs surveyed are looking at alternative finance to weather the COVID-19 downturn, with 85% of businesses having looked or are considering looking at other forms of funding to address the impact of COVID-19.

 “It looks like alternative finance is going to play a key role in supporting businesses during these difficult times. It’s important that SMEs work with reputable finance partners to ensure they get the best possible advice and financial support,” Richardson adds.