Since the onset of the coronavirus outbreak, the government has introduced a raft of support schemes to help businesses of every size make it through this unprecedented period of uncertainty. Although the government’s handling of the pandemic has been widely criticized, some of these schemes have been very successful at getting vital financial assistance to those that need it the most. One such scheme is the Bounce Back Loan.
What is a Bounce Back Loan?
The Bounce Back Loan Scheme was introduced by the Chancellor Rishi Sunak to plug some of the holes in the Coronavirus Business Interruption Loan Scheme and get faster financial assistance to struggling businesses. So far, the scheme has been very effective, with more than 1.3 million loans issued worth over £30bn.
The scheme allows smaller businesses that have lost revenue as a result of the Covid-19 outbreak to apply for a loan of between £2,000 to £50,000, capped at 25% of the business’s turnover. For many businesses, this has provided a cash flow lifeline that has allowed them to pay bills, buy supplies and meet their staffing costs at a time when revenues, for many, have plummeted.
Am I eligible for a Bounce Back Loan?
The scheme is open to a broad range of businesses, regardless of their turnover. To meet the eligibility criteria for a loan, the business must have been established on or before 1 March 2020 and:
- Has been adversely impacted by the coronavirus;
- Has not obtained a loan through the Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme or the Covid Corporate Financing Facility;
- Is engaged in trading or commercial activity in the UK at the date of the application;
- Was not a ‘business in difficulty’ on 31 December 2019 – Businesses that self-declare as a ‘business in difficulty’ on 31 December 2019 may face restrictions on the level of finance they can access and how it can be used;
- Is not in bankruptcy or liquidation at the time of the application.
If the business meets the eligibility criteria, it can apply for the loan online until 31 January 2021. You can read more about the application process here.
What can a Bounce Back Loan be Used For?
There are very few restrictions on what a Bounce Back Loan can be used for; however, it must provide an economic benefit to the business and not be used for personal purposes. That can make it a very effective way to resolve the cash flow problems your business is experiencing. You could use it to clear expensive debt such as a business credit card, pay your suppliers, buy stock, contribute to tax bills or boost your flagging revenue.
The Bounce Back Loan must only be used for the reasons allowed. If your business becomes insolvent and is subsequently liquidated, the liquidator will investigate your actions leading up to and during insolvency. If they find that the loan was used to benefit you personally, you could be disqualified from acting as a director for up to 15 years, be made personally liable for the loan’s repayment or even face a jail term.
What are the Terms of the Loan?
If you’re struggling for cash flow, the last thing you need is an expensive loan. However, the Bounce Back Loan is available with attractive terms. There’s no interest or repayments for the first year, so during that period, it’s essentially free money to help you get your business back on track. After the first year, the interest you’ll pay is fixed at 2.5%, which is far lower than other forms of business finance such as commercial loans, overdrafts and credit cards.
The loan term was initially up to six years, but that has since been extended to 10 years. You can also pay the money back earlier than that without having to pay early repayment charges. Should you struggle at any point to repay the loan, you also have the option to pause the repayments or switch to interest-only payments for up to six months.
Do I Have to Provide Any Assets as Security?
For most business loans, you would be required to provide a physical asset as security, such as property, vehicles or machinery. If the business does not repay the loan, the lender can then seize and sell the asset to recover the money it is owed. One of the most attractive aspects of the Bounce Back Loan is that it is 100% secured by the government. That means there’s no requirement to provide security and your business’s assets are not at risk.
There’s also no requirement to sign a personal guarantee, so as long as you use the loan for its intended purpose, you will not be personally liable for the loan’s repayment.
A Bounce Back Loan is Still Debt
However attractive the Bounce Back Loan Scheme may be, it’s important to remember that it’s still debt. The money will need to be repaid, with interest if you borrow it for longer than a year. So, unless the cash flow problems you’re experiencing are serious, you could be better served by avoiding the Bounce Back Loan.