“Bounce Back Loan” Scheme to Assist Struggling SMEs

The Government has announced lending assistance in the form of the “Bounce Back Loan Scheme” intended to help small and medium-sized businesses affected by the Covid-19 pandemic to borrow between £2,000 and £50,000.

Any loan granted under the Bounce Back Loan Scheme will be backed by a 100% guarantee from the Government. There will be no fees or interest to pay in the first 12 months, with the term being up to 6 years. With there being no requirement of repayment in the first 12 months, the Government has announced that it will work with lenders to agree a low rate of interest for the remainder of the loan.

Commentators across industry have stated that one of the issues of the previously announced Coronavirus Business Interruption Loan Scheme (CBIL) was that many businesses do not meet criteria for the CBILS. There has also been talk of long delays from lenders in processing applications. As such, the Chancellor has announced the Bounce Back Loan Scheme, with availability from today (Monday 4th May 2020), which would only require a “quick standard form”. It was announced that most loans would not require personal guarantees from directors, which has been an issue of the CBILS with lenders requiring further guarantees.

The eligibility requirement to obtain a loan under the Bounce Back Loan Scheme is simplified drastically in comparison to the CBILS with a business only needing to:

• be based in the UK
• have been negatively affected by Covid-19; and
• have not been an “undertaking in difficulty” on 31 December 2019.

The Government have also allowed businesses who have already been granted a loan of up to £50,000 under the CBILS to transfer it into the Bounce Back Loan Scheme before 4th November 2020, which may give them favourable repayment terms.

Future Fund: Government Support for Struggling Start Ups

In addition, the Government has announced a £500 million scheme in partnership with the British Business Bank to assist businesses during the Covid-19 crisis. The Future Fund will provide government loans ranging from £125,000 to £5 million to UK-based companies, subject to eligibility criteria.

The purpose of the scheme is to provide another option for those businesses relying on equity investment who are unable to access the Coronavirus Business Interruption Loan Scheme (CBILS). Loans under the CBILS, has had a number of teething problems with lending granted totalling only £1.1billion of the £300billion scheme, so the Future Fund is a further welcomed option for businesses.

Your business will be eligible if:

1. it is based in the UK
2. it has raised at least £250,000 in private third-party equity investment in the last 5 years; and
3. can attract private third-party investors and/or institutions to match or exceed the funding from the Future Fund.

The Government has released the Future Fund’s Headline Terms, which sets out some of the conditions to the bridging loans being provided including:

• The loans shall automatically convert to equity on the company’s next qualifying funding round at a minimum conversion discount of 20%.
• The bridge funding will carry interest of no less than 8% with the loan’s term being a maximum of 3 years.
• The use of the bridge funding shall be used only for working capital purposes and shall not be used by the company to repay borrowings or make bonus payments to staff or directors.
• The business will also be unable to create any indebtedness in preference to the bridging loan granted by the Future Fund.

These are just some of the headline terms, that will need to be reviewed by each business to ensure they are confident that they can repay the loan, or are happy to have the UK Government as a minority shareholder.

As with many of the schemes announced by the UK Government to assist businesses during the Covid-19 outbreak, ensuring your business’ eligibility and understanding the full terms of the lending will be key to successfully obtaining the funding and the long-term cash flow planning of your business.

Please contact Teri Hunter or any of the Moorcrofts’ Corporate Team, if you would like further information on the Future Fund or other debt or equity financing, or if you would like further information on the Bounce Back Loan Scheme or other debt or equity financing .