Extension of state-backed loan schemes
Feb 09, 2021
When the coronavirus crisis first hit, the government responded by creating business loan schemes such as the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) to help businesses survive the pandemic.
Extension to Bounce Back loan
The government has recently announced that small businesses are to get longer to pay back their Bounce Back loans. Under the scheme, firms get interest-free loans for the first year and were due to start re-paying the money back from May 2021, when the economy is still likely to be struggling. In order to give companies more breathing space and avoid a wave of business closures, the following ‘Pay as you Grow’ options have now been agreed:
- Loans can be extended from six to ten years, at the same fixed interest rate of 2.5%
- Interest-only payments can be made for six months – an option which is available up to three times during the duration of the loan
- Repayments can be paused for up to six months. Previously this pause was only available after the first six repayments had been made. Now it is available from the first repayment, which means businesses can choose to make no payments until 18 months after they first take out the loan.
Businesses can take up just one or two options, or a combination of all three. Lenders will get in touch with borrowers three months before their repayments are due to start, to let them know their choices. Over 1.4 million small firms have taken up a Bounce Back loan, with a total of almost £45bn being borrowed.
Will there be a permanent state-backed loan?
Plans have also been reported by the Financial Times, outlining how the government may replace the temporary Covid-19 loan schemes with a permanent state-backed small business loan scheme.
The new permanent scheme would be a successor to the existing CBILS, and would allow eligible businesses to borrow anything from a few thousand pounds up to £10 million. The loan would be paid back over six years, and the government would guarantee 80% of the value borrowed.
Banks would be allowed to set their own interest rate levels, and the rate would be capped at 15%, as it is for the CBILS. There would also be stringent lending criteria, which coupled with the higher interest rates, would make the scheme more sustainable than the BBLS and more competitive with other small business lending options. The bounce back loan has interest rates set at just 2.5%, and because it has involved only light checks on borrowers’ creditworthiness to speed up the lending process, it has sparked concerns about fraud.
One crucial difference between the new scheme proposed and the CBILS would be the use of partial personal guarantees. These mean that the borrower’s personal assets such as business and property can be used as security against the loan, which has been standard practice under similar pre-Covid schemes but was widely criticised and ruled out when the CBILS was introduced.
Although the coronavirus vaccination programme has generated hope that the economic fallout from the pandemic will soon begin to recede, the significant damage caused to the economy is likely to be felt for some considerable time to come. The government’s permanent state-backed loan would help those businesses severely weakened by Covid which are struggling to obtain necessary financial support elsewhere. The aim would be not just to help them simply survive, but to enable them to invest and grow in a post-Brexit marketplace.
No official announcement has yet been made by the Treasury, but it has confirmed that the government is definitely looking at a new, successor loan scheme. It is thought further details may emerge as part of the Chancellor’s range of options to support jobs and businesses in his upcoming Budget on 3 March 2021.