Small businesses boosted by bounce back loans

In the UK, SMEs account for 99.9% of the business population (5.9 million businesses). That works out to three fifths of the employment and around half of the turnover in the UK private sector.¹

So, with that in mind, it was absolutely crucial that the UK Government come up with a solution to get much needed cash into the accounts of SMEs that are struggling to get loans from the elusive CBILS (Coronavirus Business Interruption Loan Scheme) facility.

On 27 April 2020, Chancellor Rishi Sunak unveiled what all SMEs needed to hear, which was another coronavirus bailout measure to assist small businesses in the form of bounce back loans.

The scheme has been designed to ensure that small firms who need vital cash injections to keep operating can get finance in a matter of days. The UK Government, via tax payers, will provide lenders with a 100% guarantee for the loan and pay any fees and interest for the first 12 months.

Furthermore, no repayments will be due during the first 12 months, giving businesses ample time to recover from this crisis before needing to repay the loans.

The government bounce back loan means businesses will be able to borrow between £2,000 and £50,000 and, perhaps more importantly, be able to access those loans within days. The loans will be interest free for the first 12 months with no repayments due during those first 12 months.

Businesses can apply for this loan online through a short and simple form meaning all businesses have easy access to this scheme.

With this scheme, firms are able to borrow up to 25% of their annual turnover with the maximum amount being £50,000 per business.

Where this scheme differs from other initiatives introduced by the government, such as CBILS, is that the government will provide lenders with a 100% guarantee for the loan.

In contrast, the government only offers 80% guarantee for loans made through the CBILS scheme.

The Federation of Small Businesses National Chairman, Mike Cherry, has said that “this crucial new initiative should enable thousands of small businesses to access the working capital they need quickly, helping to protect the millions of jobs they provide in every part of the UK.”²

In summary, the scheme has been designed to ensure that smaller businesses who require vital cash injections to keep operating can get finance in a much shorter period of time than before.

This scheme also comes alongside the £6 billion awarded in business grants, supporting 4 million jobs through the job retention scheme and generous tax deferrals which are supporting hundreds of thousands of firms and allowing more people to keep their jobs.

The scheme will launch for applications on Monday 4 May, 2020 and firms will be able to access these loans through a network of accredited lenders.

The government has stated that they will work with these lenders to ensure the loans delivered through this scheme are advanced as quickly as possible and will ensure a low standardised level of interest is agreed for the remaining period of the loan.

It must be noted that although these are not loans directly from the government, the scheme encourages accredited lenders to lend to more businesses who urgently require the capital.³

Since the government is agreeing to guarantee 100% of the loans, if those businesses are unable to repay, lenders can lend money knowing that they are guaranteed repayment.

Another challenge facing the economy in the UK was large corporations not being able to access CBILS because their annual turnover was greater than £45m. As a result, the government introduced the Coronavirus Large Business Interruption Loan Scheme (CLBILS).

The scheme aims to support the largest companies within the UK with businesses qualifying for the scheme if they have a turnover of £45m+.

The Coronavirus Large Business Interruption Loan Scheme (CLBILS) aims to provide financial support to larger UK businesses across the UK that are experiencing a fall in revenue and seeing their cash flow disrupted due to the Coronavirus.

The scheme aims to facilitate access to finance for businesses with a turnover above £45 million. This differs from the existing Coronavirus Business Interruption Loan Scheme (CBILS) in that CBILS is designed for SMEs who have a turnover up to £45m per annum.

Previously companies with a turnover over £45m had little support, however CLBILS aims to provide support to larger businesses in the same way that the CBILS scheme does to SMEs.

Like the bounce back loans, businesses are able to access CLBILS through a number of accredited lenders. These lenders are able to provide up to £25 million in finance to businesses with turnover from £45 million up to £250 million.

Larger businesses who have a turnover of over £250 million are eligible to borrow up to £50 million to businesses. These loans can come in the form of the following:⁴

• Term loans
• Revolving credit facilities (including overdrafts)
• Invoice finance
• Asset finance

Where the government is able to guarantee 100% of bounce back loans to banks, the Coronavirus Large Business Interruption Loan Scheme will guarantee 80% of the loan.

Although some may think that this will deter banks from lending to lots of different companies who require these loans, larger companies who turnover in excess of £45m tend to have more fixed assets and are able to cover that 20% gap.

In comparison, smaller businesses who are going to use the bounce back loans won't have many fixed assets if any at all and so the government needs to be able to guarantee 100% of those loans.

With the arrival of these new schemes, businesses in the UK now have access to more relief than ever before.

Besides the schemes mentioned above, there have been several other Covid-19 support schemes launched by the government during the last few weeks, amounting to over £15 billion:

• The Job Retention scheme - more than 500,000 claims have been made to the value of £4.5 billion
• Business grants - half a million business properties have benefitted from £6 billion of business grants
• The Coronavirus Business Interruption Loan Scheme - with over 20,000 loans made so far
• The Covid Corporate Financing Facility - has provided over £14 billion for larger firms
• Generous VAT deferrals worth billions of pounds
• Scrapped businesses rates
• Covering the cost of statutory sick pay

With all these measures already in place, the new bounce back loans for small businesses will run alongside the existing Coronavirus Business Interruption Loan Scheme (CBILS) as well as the already mentioned Coronavirus Large Business Interruption Loan Scheme (CLBILS).

The main purpose of all the schemes listed above is to ensure that firms of all sizes are able to survive during this slump as well as being able to retain their workforce.

By firms being able to continue to pay their employees, it means more people are able to afford mortgages and rent whilst being able to spend money on products and services to get the economy moving again.

This in turn means that there are less home foreclosures which results in a far more steady supply of houses for sale on the open market.

As mentioned in our previous market insights, there are two variables that determine the UK housing market, supply and demand.

Because these schemes allow all businesses to continue paying their employees, it means the supply of homes on the market is lower (because more people are able to pay their mortgages or rent).

In terms of demand, people are continuing to be paid which means they can continue to save to either purchase their first home or to simply upgrade to a new home.

Richard Donnell, director of research and insight at Zoopla, has also stated that "some may feel the urge to move and find more space or consider the potential for remote working."⁵

Furthermore, since the UK has decreased their base rate to an all time record of 0.1%, it means mortgage rates are now cheaper meaning people are now likely to want to borrow it and get on the housing ladder.