Bounce Back Loans – Rishi Sunak unveils 100% state-backed loans for small firms

Small firms are to get access to 100% taxpayer-backed loans after they raised concerns about slow access to existing coronavirus rescue schemes.

Chancellor Rishi Sunak told the House of Commons the scheme would start next week, offering firms loans up to £50,000 within days of applying.

It aims to unlock a backlog of credit checks by banks amid fears many small firms could fold before getting loans.

The scheme requires filling in a two-page self-certification form online.

The loan terms mean that no capital or interest repayments will be due for one year. Instead, the government will pay the interest for the first 12 months.

Banks have come under fire for delays in handing out loans, but have blamed the heavy workload, need to complete the necessary credit checks, and a shortage of staff.

Underwriting the loans removes the risk that banks will not get their money back, which Mr Sunak hopes will speed up the application process. The new “microloan scheme” would provide a “simple, quick, easy” solution, he told the Commons.

In a statement issued on behalf of the major lenders to small firms, including Barclays and Lloyds, trade body UK Finance said the “welcome changes should enable banks to provide finance to businesses more quickly”.

In another significant change, firms applying for the new loans will now only have to prove that they were viable in the past before the crisis, not that they will viable after the crisis. Companies have complained they struggled to prove their future potential with some much uncertainty over the economic environment.

The chancellor had come under pressure to underwrite all loans, not just those up to £50,000. But he said he was not prepared to do this as he needed to balance the risk to the taxpayer with the needs of small businesses.

He said: “I’ve heard some calls for the government to underwrite all our loan schemes with 100% guarantees. I remain unconvinced by the case for doing that universally.

“We should not ask the ordinary taxpayers of today and tomorrow to bear the entire risk of lending almost unlimited sums to businesses who may, in some cases, have very little prospect of paying those loans back and not necessarily because of the impact of the coronavirus.”

Unlike the existing loan scheme, banks will not retain any of the risk for these loans, which could stretch into the billions or tens of billions depending on how long the crisis lasts.

And the chairman of the Federation of Small Businesses, Mike Cherry, said it would “give hope to thousands” of firms.

“To date, the existing interruption loan scheme has not been working for the small firms that make-up 99% of our business community.

“The decision by the chancellor to listen to our recommendation for a 100% guarantee on smaller loans, alongside the creation of a new fast-track system for those applying for them, will give hope to thousands.”

The Treasury’s new scheme means that huge numbers of the smallest and most vulnerable companies in the country can now get a bank loan of up to £50,000 with no interest payable in the first year. To persuade banks to lend the money, the taxpayer will cover 100pc of their losses when a borrower defaults.

It is intended to be up and running from next Monday with a simple online application procedure, and all firms trading as of March 1 will be able to get cash.

The loans will be funnelled through 48 lenders accredited by the state-owned British Business Bank and firms should receive their money within 24 hours, the Chancellor said. All lending will be fee-free and interest-free for 12 months, and can be paid back without early repayment charges.

It is thought that shifting responsibility for all losses onto the public sector in the Bounce Back scheme will encourage lenders to get money to the smallest companies more quickly.

Unveiling the new scheme, Mr Sunak said that he had to “balance the risk to the taxpayer with the need to support our smallest businesses”.

Bounce Back loans will be available to any smaller company for up to 25pc of their turnover, capped at £50,000. The effective £200,000 limit means it would cover all of UK’s the 5.6 million micro-businesses with up to nine employees, which turned over £900bn in total or £160,000 each last year according to Government figures.

Dame Caroline Fairbairn, director-general of the Confederation of British Industry, said thousands of businesses could be saved by the lifeline.

She added: “Banks now need to continue their work in overdrive to get the loans flowing faster.”

The Treasury has already responded to criticism over the main CBILS, where loans of up to £5m are 80pc guaranteed, by banning demands for personal guarantees where banks have a claim over a director’s property on loans below £250,000.

Sources: BBC New; GOV.UK; Daily Telegraph (Russell Lynch, Economics Editor 27/04/2020)

Edit and Emphasis: T. Bathgate MBA