Practical Guidance Note #8
COVID-19: Treasury support for small businesses now confirmed
Following mounting pressure, the Chancellor today announced that small firms will get access to 100% government-backed loans following concerns over the time it was taking to access rescue schemes.
The so-called Bounce Back Loans will start from next week and will offer firms up to £50,000 within days of an application being made.
27th April 2020
Mark Neath See profile
The application process has been simplified and requires a two-page self-certification form to be completed online to alleviate the backlog of bank credit checks that have built up under the original scheme.
Under the new scheme, no capital or interest payments are due for the first year; instead the government will pay the interest for the first 12 months.
Details are still emerging, but it appears that businesses can apply for new Bounce Back Loans up to a maximum of £50,000, or 25% of turnover from 9.00am on Monday 4 May. There will be no forward-looking tests of business viability; no complex eligibility criteria; just a simple, quick, standard form for businesses to fill in.
Mr Sunak has capped the new scheme with a loan ceiling of £50,000 despite pressure to underwrite all government loan schemes with a 100% guarantee. The Chancellor justified this decision by saying ‘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.’
This development will provide a lifeline for thousands of small businesses struggling to stay afloat with a simpler route to unlock much needed finance more quickly.
‘More government support will obviously be welcomed by businesses but the fact that we are even having the debate about the guarantee level demonstrates that loans in some cases are not the right tool for the job. If a bank has assessed a business proposition and concluded that affordability is not sufficient to repay the loan, then the bank should not lend, and it would be the wrong thing for the business to borrow.
Now the Treasury is going to provide a 100% default guarantee for certain loans doesn’t alter the underlying facts that the business looks unable to service the loan and that borrowing would be the wrong thing. Even the Chancellor appears to acknowledge that loans are going to be made with little prospect of them being repaid.
If that happened, such that the Government guarantee was more likely than not going to be called upon, then it begs the question why not simply give a grant and spare the banks and business owners a lot of work and ultimately stress and pain to end up at the same place?
The media narrative I keep reading day after day is that banks’ lending criteria are denying loans to businesses. Perhaps the story ought to read: banks’ lending criteria protect businesses from inappropriate borrowing, what is the Government going to offer instead? I fail to see how 100% guarantee is the answer.’
We will continue to share more details as they emerge.