Various different loans schemes were launched too during the crisis and, for the most part, businesses simply ignored them.
Why? Because the loans being offered beared an uncanny resemblance to the Enterprise Finance Guarantee (EFG). Under the EFG, the government underwrote 80% of the balance of the loan in case of default. That sounds quite reasonable until you dig a little deeper.
If your company defaulted, the bank would chase you for the cash – in most cases, personal guarantees had to be provided on EFG loans. The bank could only approach the government for funding once they had exhausted absolutely every avenue in trying to get the cash from you. And, as you can imagine, they were relentless in their pursuit.
So the 80% underwriting was never meant to protect you – the borrower. It was there to protect the bank. Sound eerily familiar?
The government originally promised £330bn worth of funding through loans with the Coronavirus Business Interruption Loan Scheme (CBILS) (also known as EFG Mark II) in March. By the end of May, only £7bn had been borrowed by businesses using the scheme.
Thankfully, most people know a bad deal when they see one and this was a bad deal. The reaction to the Bounce Back Loan was very different – in the few weeks since its launch, over £15bn had been borrowed.
What is the Bounce Back loan? Should you take it? How should you use it?
In this article, Sunny Accountants explains:
- what the Bounce Back Loan is and the caveats you need to be aware of
- should you use the money for working capital?
- should you repay existing, more expensive business debts?
- why it might be an opportune time to settle up with suppliers with one eye on the future
- should you use it to fund redundancy payments if you have to let people go?
- why now might be the time to invest in your website and in marketing
- cheap funding for investment in plant, machinery, and equipment
A few important caveats
There are no personal guarantees required with the Bounce Back loan. You may borrow the equivalent of 3 months' turnover to a maximum of £50,000. There are no repayments for the first 12 months and, from month 13, you only repay £833 a month or thereabouts for 60 months. You may repay the loan at any time in full without incurring interest or early repayment penalties.
So, they can't come after your property or other assets because there is no requirement to sign a personal guarantee? Yes and no. For limited companies borrowing the money, the directors need pledge no property, assets, or otherwise. If the loan defaults, the government can't chase you and your other directors for the money. A default will impact on your business's credit rating and not your personal credit rating.
While sole traders and partners do not have to pledge personal security when they apply, the Bounce Back loan will be considered as and treated as a personal debt. If the bank or any other institution pursues the debt and they choose to initiate bankruptcy proceedings on default, your home or any other assets might be included within the “bankruptcy” estate.
The truth is that, at the moment, no-one quite knows. Here is an element of ambiguity which we regret that we've not been able to get absolute clarity on.
You're also not allowed to apply for a Bounce Back loan if:
- there has been no discernible adverse effect on your trading since the beginning of the crisis
- your company was in trouble at the end of 2019.
- you began trading before 1st March 2020
- your business is not bankrupt or in liquidation
- you're not using any other coronavirus loan scheme unless you intend to pay it back in full prior to apply for a Bounce Back loan
- less than half of your income comes from trading
Caveat section now over – what could you spend the money on?
Use for working capital
Many companies have seen their turnover dramatically reduce, sometimes to zero, as a result of the lockdown initiated on March 23rd. Tens of thousands of offices, shops, factories, and warehouses have had to close their doors to business – even if a customer wished to place an order, there's no-one there to fulfil the order.
While the government's furlough scheme helped meet wage costs, businesses have other bills that they must meet. At the beginning of the crisis, you may have taken action to reduce other costs – a move which will potentially save your business depending on how much cash in the bank you had before all this happened.
Those initial reserves topped up with the Bounce Back loan may mean that you can continue to pay bills for a lot longer now. This will give your company the cash bridge it needs to survive between where it is today and the time when things have returned to normal.
We would recommend that you continue in the “cash preservation” mode you're already in if, even with the Bounce Back loan money added to your reserves, things may look tight for the foreseeable future or if you're in a vulnerable sector.
Should I use it to make people redundant?
If you need to make some staff redundant to protect cash flow because you're unable to predict levels of demand for the foreseeable future, you have our sympathies. What you have to do is essential to save the jobs of others (as well as the business) but it's an unpleasant task you have to carry out.
The Redundancy Payment Service (RPS) allows you to borrow money from the government if the costs you incur as a result of a redundancy program jeopardise the future of your business. You will have to provide evidence that repayment of your company's redundancy program loan is affordable together with evidence that your business is likely to survive over the longer term.
The government has produced no specific guidelines on whether successfully applying for a Bounce Back loan would affect an application for support from the RPS – this is truly unchartered territory.
You may wish to argue to the RPS that you need both in order to survive. They consider each application on its merits anyway and, given the upheaval the country has been through in the last 10 weeks, they may be more sympathetic at this time to companies applying for both a Bounce Back loan and for redundancy payment support.
Repay other business debts
Are you currently making monthly repayments on other finance facilities taken out by your business?
The likelihood is that the debts you're currently servicing will attract a higher interest rate than the Bounce Back loan scheme. Some of the debts you have you may have had to pledge a personal guarantee to secure.
- your revenues have not been greatly affected by the coronavirus situation,
- you had a decent cash balance entering the crisis, and
- you're confident you're able to continue to meet your other fixed costs between this point and time and when it's all over
…there may be a strong business case for using the Bounce Back loan to repay in full or in part your existing finance facilities if your company has enough cash in the bank to get through this crisis.
Settle up with suppliers
Likewise, if your company entered the current crisis with a decent cash balance, your traditional suppliers would very much appreciate settlement of their invoices as soon as possible so that they can protect their own cash balances.
If making quick payment to your suppliers does put any cash flow pressure on your business, your actions might very well endear you further to your supplier in the future. Every business gets into occasional trouble and we all remember those suppliers and customers who stuck with us during those difficult times.
For many other suppliers whose revenue has dropped and which may be left with high stock levels, now might be the time to negotiate a discount on the standard prices you pay. They'd appreciate the cash and you'll appreciate the extra gross profit margin when you sell the stock on.
Re-do your website and promotion
The companies which survive a recession often come out of it much stronger at the other end. Their owners learn better how to manage budgets, they experiment a lot more on different ways to reach new and existing customers, and there are less competitors chasing the same target audience when the recession is over.
No-one is quite sure about how long the COVID-19 recession is going to last for. The government (and just about everybody else) is hoping for an immediate rebound however economists are becoming increasingly gloomy about the likelihood of that outcome.
During this period, keep in touch with all your existing clients. Aggressively market to new ones. Improve your website so that it can be found by potential customers and make that that your website gives those potential customers all the information they need to build trust in your company and make the decision to buy from you.
If you are able to borrow £50,000, spending £10,000-£20,000 on a website revamp and on constant outbound marketing will make a significant difference to the revenues you bring in now and those you bring in in the future.
Many accountants are often accused of knowing the price of everything but the value of nothing. Not this accountant – we have upped spending during this time, got in touch with new clients, and we're now starting to grow again.
Marketing does work – please don't stop it.
Invest in plant, machinery, and equipment
While predicting demand levels is very difficult once this period of upheaval is over, it's reasonable to assume that, for most businesses, demand will return (albeit gradually) and your customers will still expect the very best.
Perhaps you have plant, machinery, or equipment which needs replacing so that you can keep up with the quality of your competitors' products. Perhaps, prior to the crisis, you were put off by the interest charges you'd have to pay on finance facilities to purchase or lease the plant, machinery, or equipment you'd like.
With no repayments for a year and interest on the loans set at just 2.5% per annum, the Bounce Back loan may make the cost of the new plant, machinery, or equipment you want more attractive.
The coronavirus crisis, the Bounce Back loan, and your business
To speak with a Sunny representative about the Bounce Back loan and your business in general and how it's coping, please call us on 01623 559 362 or email us on [email protected].
For a free chat on how we can help you, please complete the contact form below and we will be in touch.