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IPSE guide to Bounce Back Loans for the self-employed: are they an option for sole traders and company directors?
- 27 Aug 2020
Despite an unprecedented package of government assistance for businesses to mitigate the economic impact of the coronavirus lockdown, many individuals still find themselves without support months into the pandemic. As IPSE has highlighted in recent months, it is particularly groups amongst the self-employed community – company directors, newly self-employed sole traders or those with profits above £50,000 – who have slipped through the net of government support.
One option that the government introduced in April 2020 as a potential avenue for those who could not access the main Job Retention Scheme (JRS) or Self-Employment Income Support Scheme (SEISS) were the ‘Bounce Back Loans (BBL)’.
This article covers what the BBL is, the eligibility criteria and application process, and a few pros and cons that you might want to consider before applying.
Background: what are Bounce Back Loans and why were they introduced?
BBLs were introduced by the government in April, largely in response to the difficulty that small businesses were having in accessing the Coronavirus Business Interruption Loan Scheme (CBILS). Specifically, there were reports that the eligibility criteria and application process for the CBILS were proving restrictive and complicated, with banks reluctant to lend and even requesting personal guarantees for small loans.
To meet demand among smaller firms for financial support, the Chancellor Rishi Sunak announced the launch of a new scheme providing a "simple, quick, easy solution for those in need of smaller loans" – the so-called Bounce Back Loans.
Here are the key features of the BBL scheme:
- Businesses can borrow between £2,000 and £50,000 - the amount is capped at 25% of your total turnover
- The government is guaranteeing 100% of the loan - no interest or repayments need to be made in the first year, and the interest rate is fixed at 2.5% thereafter across all lenders
- The length of the loan is 6 years but you can repay early without penalty
- Lenders are not permitted to take personal guarantees or take recovery action over a borrower’s personal assets (such as their main home or personal vehicle).
- The loans are delivered through a network of accredited lenders – there are currently 27 – however the availability and terms vary between providers
- The deadline for applications is 4 November 2020
As of 16 August, there have been 1,430,017 applications for BBLs, of which 1,174,854 lending facilities have been approved worth a total value of £35.4bn. In effect, this means that roughly 82% of applications are being approved. This is a significantly higher figure than the applications for the CBILS (50%) and Large CBILS (55%).
Bounce Back Loan eligibility criteria
Given the scheme is intended to be more accessible than the CBILS, the eligibility criteria are relatively straightforward. While there is a more extensive set of criteria on the FAQ page of the British Business Bank website, with reference to businesses operating in specific sectors, in broad terms, to be eligible for a Bounce Back Loan, your business must:
- Be based in the UK
- Have been trading in the UK and established by 1 March 2020
- Have been adversely impacted by the coronavirus
- Not have been a ‘business in difficulty’ at 31 December 2019 or in bankruptcy or liquidation at the time it submits its application for finance
- Derive more than 50% of its income from its trading activity
- Use the loan only to provide economic benefit to the business, and not for personal purposes
In effect, this means that sole trader and limited company directors can apply. Your credit rating will not be taken into account as part of your eligibility – however as part of the application process (detailed below) there has been evidence that some lenders are conducting ‘soft’ credit checks, particularly for those individuals who are new customers and opening an account with the provider for the first time. Significantly, lenders do not have to assess a business’ affordability or viability.
Lastly, it is important to note that BBLs do not affect your eligibility for other government financial support (with the one exception being if you have already received a CBIL). In other words, you can still apply for a BBL even if you are in receipt of the SEISS and you could still apply for Universal Credit as well.
Bounce Back Loan application process
First, you need to find and approach a lender. The BBL scheme is delivered via the British Business Bank through a network of 27 accredited lenders (25 excluding Northern Ireland). The full list is here and includes most of the big banks and building societies, such as Lloyds, HSBC, Natwest and Barclays as well as newer providers like Starling Bank.
The British Business bank states that, in the first instance, “you should approach your own provider” and consider approaching others if you are unable to access finance from them.
IPSE is not in a position to recommend a particular lender, and while there is a lot of similarity among the providers given the relatively ‘fixed’ aspects of the loan, they each have their own approach to prospective applicants alongside the standard criteria outlined above. We recommend that individuals consider their existing provider first but, if your application is unsuccessful or you have a strong reason not to use your current provider, it is worth taking a look online and doing a bit of research into other options.
Every accredited lender is currently accepting loan applications from existing business customers. Limited companies will already have a business account. However, for sole traders who run their business finances through a personal account, things may be slightly more complex and they may need to open a business or ‘feeder’ account.
While the Treasury encouraged banks and building societies to open up their applications to new customers, the reality is very few have done so. While this is a changing picture, as of today (August 26) the following lenders are accepting new customers:
- Starling Bank
- Yorkshire Bank
- Clydesdale Bank
Unsurprisingly, these lenders have reportedly been overwhelmed by applications and the process – which will involve opening a business account with the lender – may take some time. Therefore, this comes with a health warning that people may experience significant delays to applying and receiving money, if they are approved.
Second, once you know which lender you will approach, you will have to complete the application process. This process is a relatively straightforward online application, self-certifying you are eligible for the scheme and that your business has been affected by the coronavirus. You will need the following basic information:
- business name and address
- registered number (if a limited company)
- business turnover (for the 2019 calendar year) and a copy of your tax return
- bank account details
- the value of the loan you want
After this, as the British Business Bank states, applications from eligible borrowers will be subject to customer fraud, Anti-Money Laundering (AML) and Know Your Customer (KYC) checks. Those lenders accepting new customers have also been reported to be looking at ‘soft’ credit checks on top of this as part of their standard due diligence.
If your application is approved, the loan is intended to arrive within days however there has been some reports of significant delays in the money arriving into accounts.
What can the Bounce Back Loan be used for?
The British Business Bank is clear that your business “must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital, and not for personal purposes.” However, this is a fairly broad definition and there are no strict guidelines beyond the specification that this must be used for business rather than personal purposes. It can be taken to include things such as payment for bills, business running costs, investment and wages. You may be able to use the loan to pay off other business debts, but this is something you may need to check with the individual lender.
For limited company directors, you can use the loan to pay your salary – but there are obvious risks in thinking about using the loan to pay dividends or a director’s loan via the company. IPSE advise that you discuss specific uses and implications with a tax accountant or adviser if you are unsure.
Repayment of the Loan
As stated above, no repayment or interest will be due in the first 12 months. After that, you will repay the capital owed in monthly instalments and interest will be fixed at 2.5% p.a. for the 6-year term.
Ultimately, as with any loan, there is a possibility you may not be able to repay the full amount. The British Business Bank guidance on what to do if you feel you are struggling to repay the loan is to speak with your lender, as they will have processes in place to support customers experiencing financial difficulties.
As stated above, lenders are not permitted to require personal guarantees for the BBLs. The Bank also states that for sole traders or small partnerships, “the terms of the Bounce Back Loan Scheme mean no recovery action can be taken over a principal private residence or a primary personal vehicle.”
If your business cannot repay the loan, the government guarantee will only be activated once the lender has chased you for what is owed.
Pros and cons of the Bounce Back Loan for sole traders and limited company directors
At the end of the day, no one knows your business better than you and IPSE do not advocate the BBLs as either a positive or negative solution if you are facing financial challenges. It is simply an option. However, here are some very broad considerations to take into account if you are thinking about applying:
- Relatively straightforward application process, enabling fast access to money to help your business
- Comparatively high success rate of applicants (82%) compared to CBILS
- No repayments, interest or fees for the first 12 months and can pay back early with no charges
- Low rate of annual interest at 2.5% – this is also fixed, so repayments will stay the same for the term of the loan, helping you to budget
- Loan is unsecured – no personal guarantees required
- It is a loan, not a grant – the debt will still need to be repaid and it is hard to forecast the economy over the next 12-18 months
- Concerns around the accredited lenders – with varying reports of ease of applying and being accepted by different ones
- Borrowing is capped at £50,000
- Broad definition of how the loan can be used may incur suspicions of HMRC further down the line
Ultimately the Bounce Back Loan scheme is no substitute for the lack of direct financial support faced by the many small businesses and freelancers who missed out on SEISS or JRS. IPSE are continuing to campaign for those who have fallen through the net. But after months without income, those who feel they can still make their business work but need some bridging finance to keep them going may find the BBL a useful option.
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