The Treasury has issued more guidance on The Recovery Loan Scheme. However, many questions remain unanswered.
The Recovery Loan Scheme is designed to ensure businesses of any size can continue to access loans and other kinds of finance up to £10 million per business once the existing COVID-19 loan schemes close.
Interestingly, “the finance can be used for any legitimate business purpose, including growth and investment.”
The scheme is due to launch on 6th April and is open until 31st December, although the close date is subject to review.
The loans will be available through a network of accredited lenders. However, at this stage, it is not clear who the lenders will be.
The government will guarantee 80% of the finance to the lender with the expectation that this will provide confidence to lend to businesses.
There will be two types of finance:
- Term loans and overdrafts will be available for amounts between £25,001 and £10 million per business.
- Invoice finance and asset finance will be available for amounts between £1,000 and £10 million per business.
The term period is up to six years for loans and asset finance facilities and up to three years for overdrafts and invoice finance facilities.
No personal guarantees can be taken on facilities of up to £250,000, and in no circumstances can the principal private residence of the borrower be taken as security.
The eligibility criteria for the Recovery Loan Scheme are that your business:
- is trading in the UK;
- is viable or would be viable were it not for COVID-19;
- has been impacted by COVID-19; and
- is not in collective insolvency proceedings.
A definition of “collective insolvency proceedings” will be issued in due course.
Businesses that have funding under the existing COVID-19 loan schemes will be eligible to the Recovery Loan Scheme if they meet all other eligibility criteria.
Only a few business sectors cannot apply:
- banks, building societies, insurers and reinsurers (but not insurance brokers);
- public-sector bodies;
- state-funded primary and secondary schools.
However, there are crucial questions that still need to be answered, primarily what will the interest rate be and precisely what security demands can lenders make?
The Recovery Loan Scheme launches as banks are about to start collecting the first repayments from the Bounce Back and Coronavirus Business Interruption Loan schemes in June.
Banks are privately indicating that 40-50% of the loans issued will not be paid either due to affordability or fraud.
Given this backdrop, the level of enthusiasm for The Recovery Loan Scheme amongst the traditional High Street banks remains to be seen. However, this may provide an opportunity for alternative lenders to deliver a greater proportion of the overall funding.
We will be publishing updates on The Recovery Loan Scheme over the course of the next month as we receive more clarity on these issues.
Jon Cooper is a director and senior accountant at Cooperfaure where he shares his knowledge and experience by publishing these helpful guides and articles in our blog. If you find this information useful, be sure to subscribe to receive regular updates.