It was announced earlier this week that the government plan to offer Bounce Back loans of between £2,000 and £50,000 to micro businesses as a result of ongoing coronavirus fears amongst owners.
The loan will be interest and fee-free for the first 12 months and can be taken out over a period of up to six years – a time frame that Chancellor Risihi Sunak believes will be enough to turn fortunes around for those struggling.
In his statement on Monday he told press, “Our smallest businesses are the backbone of our economy and play a vital role in their communities…This new rapid loan scheme will help ensure they get the finance they need quickly to help survive this crisis”.
The application form for businesses has been touted as a ‘light-touch’ approach, with the application form simply being an online form that can be completed fairly quickly. In fact, lenders only have to check that the business was a going concern prior to the pandemic, not what their position is today.
The “going concern” requirement may prove a problem if the funder seeks to “claim” against the guarantee as we have seen this before in the past. When lenders tried to push through vast numbers of claims against stop loss policies, insurers attempted to evade liability, citing irresponsible underwriting. There is still a lingering suspicion that if huge numbers of claims are made for these loans, HMG may look to pursue a similar defence.
On the flip side, the only risks to funders is that a loan doesn’t meet the eligibility criteria – the British Business Bank is still to publish them for these loans so it is very much still a waiting game for most. There is also a higher risk of fraud, which has been acknowledged by the majority of experts.
In a seemingly back-covering move from the government, it has been reported that the scheme isn’t as all-encompassing as it was initially presented. What is being dubbed “The Bounce Back Loan” has a rather large string attached – those who have already benefited from the Coronavirus Business Interruption Loan Scheme (CBILS) won’t be able to apply this time around.
The CBILS plan, which launched at the back end of March was aimed at SME’s who were turning over up to £45m with loans as much as £5m, but only 80% guaranteed by the government. This is where the crucial difference lies. Companies who have smaller turnovers are now looking to switch over to the Bounce Back scheme due to its more accommodating terms for those who have no need for large CBILS windfalls.
Most estate agents and similar businesses can convert their CBILS loans to Bounce Backs in order to take advantage of these new terms, but they cannot try and utilise it for new funding.
Following the government payment coverage period, lenders would need to ensure collection and enforcement practices are in line with the British Business Bank Standard of Care and the FCAs Dear CEO Letter in the topic, for which non-compliance may jeopardise the guarantee and create reputational damage.
Quadrin are set up to perform a verification role to check disbursed loans are compliant. For more advice on seeking a Bounce Back loan you can learn more here. And for help with all things structured finance and securitisation due diligence, you can find out more here.