The disruption of the Covid-19 pandemic and the lockdown measures to mitigate it have impacted almost every business in the UK. Back in March 2020, this created a huge amount of uncertainty, with there being a real threat to the survival of many businesses. Various government measures were rapidly introduced and these have helped viable businesses survive the short-term impact of Covid-19.
One measure to help businesses was the support provided by various government-backed lending schemes, these being the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Bounce Back Loan Scheme (BBLS). These schemes were relatively easy to access and launched at a time of huge uncertainty, meaning that there was an extremely high uptake from trading businesses across almost all eligible sectors. The British Business Bank has reported that over £75 billion of loans were made to over 1.6 million businesses across the UK.
CBILS, CLBILS and BBLS closed for applications on 31 March 2021, but a new lending scheme, the Recovery Loan Scheme (RLS) was launched on 6 April 2021. This is in recognition of the fact that although many businesses have now traded through and survived the Covid-19 pandemic, further support may be needed as they look to recover and grow over the next 12 months. The RLS will initially be open to applications until 31 December 2021.
The RLS is a new scheme and is not a direct replacement for CBILS, CLBILS or BBLS. Although there are some similarities, for example the fact that 80% of the loan is backed by a government guarantee, there are some key differences. For instance, it is unlikely that businesses will be able to benefit from an initial capital holiday or an interest free period as was the case under CBILS and BBLS.
Which businesses can apply for RLS loans?
Most trading businesses based in the UK can apply for loans under the RLS, provided the business:
- Has a viable business proposition;
- Has been adversely impacted by Covid-19; and
- Will use the financing for legitimate business purposes.
There are no turnover limits, as was the case under CBILS, CLBILS and BBLS.
To be eligible, more than 50% of a business’ turnover must be generated from trading activities (registered charities and further education establishments are exempt from this requirement).
Given that Covid-19 has had an impact on businesses for well over a year now, historical financial information should be able to clearly demonstrate whether a business has been adversely impacted. To demonstrate that a business remains viable, there should be evidence that there has been some recovery, however this will also be captured by cash flow forecasts. Such forecasts should also illustrate that there is a funding requirement, be it for working capital or investment to fund growth. Banks will need to be comfortable that the borrower is a viable business, although it may (at its discretion) overlook any concerns over a business’ short to medium-term performance due to the uncertainty and the ongoing impact of Covid-19.
Although all businesses are eligible for the RLS, it is more likely that sectors which expect to see a recovery over the next few months will benefit most from new loans under the RLS, as there will be a real working capital requirement to kick start these business. Such sectors include retail, leisure, hospitality and travel. There may also be growth opportunities presented by the impact of Covid-19 which apply to a much wider range of sectors.
How much can be borrowed under the RLS?
Loans of up to £10 million can be provided to a company (up to a maximum of £30 million per borrower group). However, this is a cap and there are other factors which impact upon the maximum a business can borrow which are as follows:
- Double the business’ wage bill for 2019 (or 2020 if accounts are available).
- 25% of the business’ turnover for 2019.
- The liquidity needs of a business for the next 12 months (or 18 months for SMEs).
In addition, it should be noted that any amount already borrowed under CBILS or CLBILS will count towards the maximum amount that can be borrowed.
The debt capacity of a business and affordability of debt repayments should always dictate the level of debt that should be taken on under the RLS. Lenders will certainly take this into consideration.
Can a business apply for an RLS loan if it has already borrowed under CBILS, CLBILS or BBLS?
Yes, additional amounts can be borrowed under the RLS provided a business meets the eligibility criteria mentioned above and a bank considers that the additional loan is affordable.
Can a business refinance its existing CBILS, CLBILS or BBLS facility?
Yes, these facilities or, indeed, other bank debt (under certain circumstances) can be refinanced under the RLS. This may be desirable if the terms offered under the RLS are more favourable than those under the existing loan facilities.
However, it should be noted that under the RLS, interest is typically payable from day one and therefore you would lose the remaining benefit of any existing loan under CBILS or BBLS, being no interest for the first 12 months (via the Business Interruption Payment received from the government, which is not available under the RLS). Therefore, if you are looking to refinance a CBILS or BBLS loan, it would be advisable to wait 12 months from when any CBILS or BBLS loans were first made to your business.
Another consideration worth bearing in mind before refinancing a BBLS loan is that a business would lose the benefit of taking up a Pay As You Grow repayment option, which enables the borrower to extend the term of the loan to 10 years or to reduce capital and/or interest payments for a period of six months.
What information will a lender need to see?
Before loans are advanced as part of the RLS, a bank will need to be comfortable that a business will be able to meet both interest and capital payments over the term of the loan. To make this assessment, a bank will need information such as recent management accounts, a business plan, historic statutory financial statements and details of assets.
Following Brexit, companies registered in Great Britain will no longer need to demonstrate to a lender that they are not an ‘Undertaking in Difficulty’ under EU State aid regulation (although they cannot be in collective insolvency proceedings). For some companies, this proved to be challenging in obtaining loans under CBILS and CLBILS due to certain technicalities under EU law. However, companies with a presence in Northern Ireland will potentially remain subject to EU State aid regulation for the time being.
What are the key terms of the RLS?
Loans under the RLS can be for a term of up to six years, with capital and interest typically being payable from the months following the loan being made. The interest rate applied will be at the discretion of the lender (different banks will charge different rates of interest), however given the fact that 80% of the loan is backed by a government guarantee, interest rates should be lower as compared to loans that are not part of the RLS.