The Covid-19 pandemic has had dramatic economic impacts across the UK. To help struggling small businesses during this difficult time, the government launched the Bounce Back Loan scheme in May 2020. This new type of loan called a bounce-back loan, aimed to make accessing funds quick and simple for eligible small businesses.
What is a Bounce Back Loan?
A bounce-back loan is a type of term loan made available by the UK Government through accredited lenders to help small and medium-sized enterprises (SMEs) that are struggling due to the coronavirus pandemic. It was designed to be an easy-to-access loan to help businesses cover overhead costs and weather the COVID-19 storm.
Some key features of bounce-back loans include:
- Loans are between £2,000 and £50,000 and are interest-free for the first 12 months. After one year, interest will be charged at a rate of 2.5% per annum.
- Loans are 100% guaranteed by the UK government, meaning lenders take on no credit risk. If a borrower defaults, the lender can claim the amount owed back from the government.
- No initial repayments are due for the first 12 months. Borrowers will only need to start repaying the loan from the 13th month.
- Loans are available through accredited commercial lenders like major banks and fintech lenders via an online application process.
- Loans are unsecured, meaning borrowers do not need to provide collateral or assets as security against the loan.
- Applications can be made by any qualifying UK business that has been negatively impacted by the pandemic. This includes sole traders, partnerships, limited companies, trusts, etc.
In summary, a bounce-back loan is a government-backed loan designed to quickly provide eligible small businesses with working capital to help overcome cashflow issues caused by the pandemic disruptions. Let’s explore the eligibility criteria and application process in more detail.
Eligibility for Bounce Back Loans
To be eligible to apply for a bounce-back loan, businesses must meet the following criteria:
- Be operating in the UK
- Have a business bank account in the UK that is less than two years old
- Not be classified as an “undertaking in difficulty” on 31 December 2019
- Not be in liquidation or bankruptcy
- Have fewer than 50 employees
- Have a turnover not exceeding £6.5 million per year
Some business types cannot apply, such as banks, building societies, insurance companies, public bodies, and state-funded primary and secondary schools. Investment businesses like asset management firms or investment holding companies are also ineligible.
Applying businesses must demonstrate how their operations and cashflow have been negatively impacted by the coronavirus pandemic. They simply need to self-certify this on their bounce back loan application form rather than providing detailed evidence or accounts.
Applicants are also not subject to traditional credit checks. Lenders must not request significant information about previous lending history or make complex assessments of creditworthiness. The sole focus is on meeting the basic eligibility criteria defined by the UK government scheme.
Applying for a Bounce Back Loan
Once verified as eligible, applying for a bounce-back loan is a fast and simple online process. Here are the basic steps:
- Find an Accredited Lender
Major banks and alternative lenders are authorized to provide bounce-back loans. Search online for participating lenders and compare loan features. - Complete the Online Application Form
Applications can typically be completed in under 30 minutes. Basic business and financial details are required along with self-certifying Covid-19 financial impacts. - Submit Supporting Documents
Identity documents like a driver’s license or passport may need to be uploaded for anti-money laundering checks. Business registration details are also required. - Loan Decision and Funding
Decisions are aimed to be made on the same day for most complete applications. If approved, funds are paid out within a day or two directly into your business account. - Start Using Your Loan Funds
Borrowers can use the borrowed funds to help cover ongoing operating costs like rent or utilities, replenish stock levels or inventory, or pay staff salaries.
With no credit checks or assessments required, application approvals are very high. The whole process from start to access funds is designed to be as swift and straightforward as possible to get money in the hands of small businesses without delay.
Loan Repayment Responsibilities
While bounce-back loans aim to provide immediate relief from cashflow issues, borrowers do have repayment responsibilities to consider:
- Interest-Free Period: There is a full 12 months interest-free on loan principal, starting from the date funds are received.
- Interest Accrual: After 12 months, interest of 2.5% per annum is charged on the outstanding loan balance each month going forward.
- Loan Term: Borrowers have a maximum of 10 years to fully repay the loan balance and all accrued interest.
- Minimum Payments: From months 13-57, repayments can be made in flexible amounts each month. Minimum repayments must be enough to settle the outstanding amount within the 10-year term.
- Balloon Payment: Any remaining loan balance after 120 monthly payments will need to be paid off in one lump sum balloon payment.
- Early Repayment Allowed: Borrowers can choose to repay all or part of their loan balance at any time without penalty.
Missing payments will damage future access to finance. However, borrowers struggling can request amended repayment plans from lenders. Overall, the long repayment timeline provides significant flexibility compared to conventional business loans.
Importantly, the UK government has indicated that borrowers will not be pursued for unpaid loan amounts due to further effects of the pandemic. This provides reassurance during a period of economic uncertainty.
Using Loan Funds Responsibly
While bounce-back loans aim to help viable small businesses survive this difficult period, some key responsibilities exist when using the funds:
- Loan amounts should only be borrowed to cover actual business needs and ongoing costs, not speculative purposes.
- Borrowers are personally responsible for loan repayments even if the business fails. Loans do not get written off in insolvency.
- Poor due diligence on loan needs could risk over-borrowing and repayment struggles later as economic conditions improve.
- Funds must only be used to support the applicant’s business, not for private or non-business purposes.
- Proper accounting records showing loan usage must be kept to ensure transparency.
- Borrowers should have a plan in place to transition back to self-sufficiency and avoid reliance on loan funds.
Responsible use alongside careful cashflow management and viability planning is important. Bounce back loans are a lifeline, not a free pass, so take on only what is needed to support genuine business survival.
Alternatives to Bounce Back Loans
While bounce-back loans aim to be the most accessible option, other alternatives exist depending on business needs:
- Apply for a CBILS Term Loan instead: More traditional loans with higher borrowing limits but stricter vetting by lenders based on credit history. It may suit larger funding needs.
- Use a Business Credit Card: Offers short-term financing flexibility but interest rates are higher than bounce back loans. Be sure not to rely on cards long-term.
- Seek Funding from Owners or Investors: Consider taking on additional investment from owners/directors or seek out angel investors willing to provide capital without repayment responsibilities.
- Supplier Payment Deferrals: Many suppliers offer short-term payment plan options or deferred payment schedules to ease cashflow strains.
- Revenue Collection Improvements: Focus efforts on invoicing clients faster, reducing DSO times through online payments, and ensuring solid collection procedures. Every marginal cash injection helps.
The goal is ensuring funding matches sustainability needs over the longer-term. Bounce back loans suit many situations but alternatives deserve consideration too depending on business circumstances.
Key Risks and Considerations
While bounce-back loans aim to provide swift support, all lending involves inherent risks that borrowers need to carefully consider:
- Repayment Risk: If the pandemic persists for longer than hoped or a second wave hits, borrowers may struggle to repay loans down the line. Poor planning could trap some in debt traps.
- Over-borrowing Risk: Some businesses may see loans as free money and over-borrow for aspirations rather than needs. This risks future viability if amounts cannot be managed responsibly.
- Business Viability: Only borrow if your business model, sector, and ability to adapt show clear signs of longer-term sustainability past the crisis period. Loans alone cannot save non-viable operations.
- Personal Guarantees: As business owners, your personal credit ratings and ability to take on new lending may be impacted if loans default, even years later. Repayments are ultimately a personal responsibility.
- Opportunity Costs: Funds borrowed from lenders require interest payments, so opportunities for using capital more strategically are lost.
- Regulatory Changes: Scheme eligibility and terms are set by the government and could change in future, impacting obligations for existing borrowers.
- Fraud Risk: As with any lending program, there are risks of fraudulent applications from those with no intention to repay. Strict measures are in place, but the risk still exists.
- Economic Uncertainty: While recovery is underway, further economic impacts are difficult to predict. Ongoing uncertainty makes accurate viability and cash flow planning challenging.
Careful consideration of all risks specific to each business is important before taking on debt to maximize chances of sustainable operations over both the short and long-term.