Bounce Back Loan - Alterledger

Where CBILS fails, smaller companies can get a Bounce Back Loan

The Bounce Back Loan scheme will help small and medium-sized businesses to borrow between £2,000 and £50,000. The government will guarantee 100% of the loan and there won’t be any fees or interest to pay for the first 12 months.

Loan terms will be up to 6 years. No repayments will be due during the first 12 months. The government will work with lenders to agree a low rate of interest for the remaining period of the loan. The scheme will be delivered through a network of accredited lenders.

The Coronavirus Business Interruption Loan Scheme (CBILS) was meant to provide financial support to smaller businesses (SMEs) across the UK. CBILS has been widely criticised for its low approval rate with just 1.4% of firms being successful according to the Guardian.

How do I apply for a Bounce Back Loan?

At the time of writing, the scheme is not yet open for applications. From 4th May 2020 you will be able to get a loan through a network of accredited lenders.

It is expected that the application process will involve a two page self-certification form online. This will be far simpler than the CBILS process and won’t require a cash flow forecast.

Who is eligible?

Business including sole traders and limited companies can apply for a loan if they:

are based in the UK
are negatively affected by coronavirus
were financially viable as at 31st December 2019

What if I have already applied to the CBILS?

You can’t apply for a Bounce Back Loan if you have already applied for funding under the CBILS. If you have received a loan of up to £50,000 under CBILS, it is possible to transfer this into the Bounce Back Loan scheme. You will need to arrange this with your lender by 4th November 2020.

How much funding can I apply for?

The maximum funding provided by the Bounce Back Loan Scheme is £50,000. We expect that the loan will be limited to a proportion of the business turnover. The maximum loan term is 6 years so there is likely to be some assessment of affordability based on the annual turnover (e.g. 25%).

Will I have to pay the loan back?

The scheme is a loan so you are definitely expected to repay it! The loan is backed 100% by the government. The CBILS is only backed 80% by the government, which is the reason for the slow application process and the low approval rate.

Lenders will have to exhaust all avenues available to them to recover Bounce Back Loans before making a claim to the government for bad debt. Don’t expect any leniency from the lenders!

Will I need to prove creditworthiness?

Although the scheme is backed by the government, it is individual lenders who will be providing the funds and setting the interest rates. The loan is interest free in the first 12 months as the government will be picking up the bill. After the first 12 months you will start to pay interest.

What is an undertaking in difficulty?

In general, HMRC will regard any company as being ‘in difficulty’ when it meets the criteria for insolvency under the Insolvency Act 1986, such as:

the company is unable to pay its debts as they fall due
the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (the “balance sheet test”).

There is no detail yet on the definition of an undertaking in difficulty, but it expected that the HMRC definition above will form the basis for lending decisions. This means if your company is funded by a director’s loan to the extent that it has net liabilities it will be ineligible for a bounce back loan.

The EU definition of an undertaking in difficulty is used by the Scottish Government for grants. This is taken from Section 2(18) General Block Exemption Regulations. The text is not the easiest to read:

‘undertaking in difficulty’ means an undertaking in respect of which at least one of the following circumstances occurs:
1. In the case of a limited liability company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its subscribed share capital has disappeared as a result of accumulated losses. This is the case when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital. For the purposes of this provision, ‘limited liability company’ refers in particular to the types of company mentioned in Annex I of Directive 2013/34/EU (¹) and ‘share capital’ includes, where relevant, any share premium.
2. In the case of a company where at least some members have unlimited liability for the debt of the company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses. For the purposes of this provision, ‘a company where at least some members have unlimited liability for the debt of the company’ refers in particular to the types of company mentioned in Annex II of Directive 2013/34/EU.
3. Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors.
4. Where the undertaking has received rescue aid and has not yet reimbursed the loan or terminated the guarantee, or has received restructuring aid and is still subject to a restructuring plan.
In the case of an undertaking that is not an SME, where, for the past two years:
1. the undertaking’s book debt to equity ratio has been greater than 7,5 and
2. the undertaking’s EBITDA interest coverage ratio has been below 1,0.

If your company owes a significant director’s loan balance that would prevent a loan application, you could consider converting the debt to equity in the form of share capital. Please seek legal advice before doing this!

Do I need up to date accounts?

To improve your prospects with your lender, it will help to have up to date accounts. If you have a financial year end between 31st December 2019 and 31st March 2020, now is an ideal time to prepare your annual accounts. This will help support that you weren’t an ‘undertaking in difficulty’ on 31st December 2019.

A set of accounts prepared by an accountant will also show your balance sheet position and make it easier for lenders to give you a lower rate.

Alterledger can help you improve your credit score by filing accounts with Companies House / HMRC. For more information, please use the contact form on the Alterledger website.