Let’s try and inject some clarity into the Chancellor’s announcement earlier today about the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme.
The first thing to make clear is that we have the headline detail but how those details will translate and how, or if, they will be adopted by the various lenders remains to be seen. The fog will clear over the next 7-10 days. In the meantime what do we know about the changes so far?
Bounce Back Loans Scheme (BBLS)
The Government has extended its access to the scheme which has provided financial support to over a million firms to date.
The Bounce Back Loans scheme provides up to £50,000 in funding to businesses, totally unsecured with next to no questions asked. Think self-certification for business lending. The loans are capped at 25% of turnover up to a maximum of £50,000.
One of the changes introduced today is a ‘Pay As You Grow’ repayment system. This means borrowers will have the ability to repay their loan over ten years instead of the current maximum period of six years.
The thinking is that this gives firms the ability to reduce their loan repayment costs. With a fixed interest rate of 2.5% this may be good news to many small businesses. For those businesses struggling to keep up repayments, they can opt to temporarily move to interest-only payments for up to six months, something they can do up to three times during the loan term. They can also opt to pause repayments entirely for up to six months, subject to a few conditions.
Coronavirus Business Interruption Loan Scheme (CBILS)
So far firms have borrowed more than £15 billion via CBILS. The deadline for applications has been extended to 30th November from 30th September. Good news.
The Government have also confirmed they intend to give lenders the ability to extend the loan term up to ten years with the Government guarantee remaining in place for the full period.
What Does It Mean In Practice?
There are a few points to consider.
- Lenders have the ‘option’ to extend loan terms to 10 years, they don’t appear to be required to do so
- Whilst the Government offers a ‘guarantee’ on both BBLS and CBILS the actual ‘cash’ being lent is provided by the borrower. Offering an extension to the loan term changes things considerably. Most lenders who have advanced under these loan schemes will have agreed their own funding lines for the current 5 or 6 year loan periods, they now need to change this. It could mean a reluctance from lenders to go this route. Let’s see
- Whilst changing from a 5 to 10 year loan period is no great issue for the big banks, the really active alternative lenders will find this more challenging due to how they raise their capital
- Announcing a change to the CBILS and BBLS loan criteria is fine but adopting those changes and putting the systems in place takes time. Borrowers who are looking to take advantage of the new terms now may have to exercise a little patience
- Lenders have seen an influx of new CBILS applications this week as the deadline loomed. It is fair to think the same thing will happen in November. It is also fair to think that lenders will put resources into adopting the changes. With this in mind it may make sense for those business looking to borrow to apply sooner rather than later. The influx of applications seen now may mean lenders bring forward their application cut-off dates next time, something businesses would be wise to avoid risking
All in all, the extension to the loan scheme is good news. It will take time for lenders to catch up and borrowers will need to be patient, a message that is not always communicated well.
As we get more details and understanding then we will update, for now, any questions then please get in touch. Everything we know to date is available here.
By Dave Farmer