Recovery Loan Scheme: What businesses need to know before applying

Jeremy Over, head of corporate at law firm Moore Barlow, takes a look at the government’s new Recovery Loan Scheme, outlining how it can help businesses and how it differs from the previous financial support offered by the Treasury.

The government’s new Recovery Loan Scheme (RLS), which launched on the 6th April, replaces a number of different financial support packages that expired at the end of March.

Recovery Loan Scheme business loanAs the economic challenges facing businesses evolve, so must the support the government is offering and there are some distinct differences between the new loan scheme and its predecessors that business owners need to be aware of before they apply.

What are the key differences?

The RLS replaces three loan schemes: the Coronavirus Business Interruption Loan Scheme (CBILS), it’s equivalent for larger businesses – the Coronavirus Large Business Interruption Loan Scheme (CLBILS), and the Bounce Back Loan Scheme (BBLS), which offered firms emergency funding of between £2,000 and £50,000 to address short-term cash flow issues.

Whereas the previous schemes were designed to keep firms afloat while the economy was on hiatus, this new loan is geared towards helping businesses to recover and grow as things start to get moving again. The RLS can be used for any legitimate business purpose, including managing cashflow, investment and growth.

Previously, the CBILS offered loans of up to £5m for firms with a turnover of less than £45m and businesses with a turnover of more than £45m could access up to £200m from the CLBILS. The RLS replaces both and offers all companies which are trading in the UK a maximum facility of £10m or a maximum of £30m per group with there being no turnover limit.

The new scheme takes a more traditional format and those accessing it have to pay all of the fees and interest themselves, unlike CBILS where the British Business Bank would cover these costs for the first 12 months. This means businesses need to be sure they can take on additional debt finance before they apply.

Who is eligible for the Recovery Loan Scheme?

Those applying for financial support will need to prove their business is viable, or would be if it weren’t for COVID-19, and demonstrate how they’ve been negatively affected by the pandemic. Companies are unable to apply if they are in collective insolvency proceedings.

Businesses that have already received support through one of the previous loan schemes can still apply if they meet all other eligibility criteria and, like before, the organisations that aren’t eligible are banks, building societies, insurers and reinsurers (excluding brokers), public-sector bodies and state-funded schools.

What to consider before applying

The scheme is run in conjunction with the British Business Bank, which has a list of accredited lenders. It is essential that firms do their research before applying to find the best lender to suit their needs. For example, not all lenders have every type of finance available so, if something specific like an overdraft is needed, certain lenders will be more suitable than others.

The British Business Bank website allows companies to filter by region and financial variant, such as term loans or asset finance, depending on what they are looking for and it is worth bearing in mind that the list of lenders is regularly updated. This means it might be better to wait and see what becomes available if the right offering doesn’t present itself straight away.

The scheme is currently open until 31 December 2021 so, businesses that can afford to, should take their time, do their research and be sure they’re applying for the right type of financial support. The Government still guarantees 80 percent of the loan to the lender but the borrower will be 100 percent liable for the debt and must therefore ensure that they are comfortable taking on this liability. Businesses must also be aware that although no personal guarantees will be taken on facilities up to £250,000, they may be required for facilities above this amount.

Even though the economy is starting to kick back into gear, businesses still face huge challenges and it is only right that they explore the support being offered by the government. But it is critical firms ensure they can afford to service the debt before entering into any loan agreement, even one backed by the government.

Firms must ensure that they not only assess the lender’s fees, eligibility criteria and repayment requirements but also their own economic and financial position to ensure that they will be able to make the loan repayments.

Companies need to be sure they understand what taking out a recovery loan entails, the obligations for paying it back they are undertaking and that the product they access gives them the right support in return for a potentially significant financial commitment.