Business Interruption Loan Scheme – a reality check
Obp Chartered Accountants | 1st April 2020
The banks are coming under some criticism regarding the way they are managing the Business Interruption Loan Scheme to businesses affected by the Coronovirus outbreak. Some reports in the press today state that “up to a million companies face ruin because banks are refusing to give them government-backed loans”.
In the current climate, it is a leap of faith to agree loan terms with a bank when it is still impossible to know what the future holds and when trade will return to ‘normal’ levels. This is true for the lender as well as the borrower and it is unclear what strategy some lenders will be adopting. Businesses will need to show they were viable before the coronavirus outbreak and there will be an assumption it will still be viable after the outbreak.
The Interruption Loan Scheme was introduced on the basis that the government would guarantee 80% of the loan. However in practice, the banks are still looking for security for the whole amount, especially for loans of over £100,000 and usually this will take the form of a Personal Guarantee. If there is default on the loan, the banks will initially look for repayment from the personal guarantee however it is unclear whether the bank would actually go after the personal assets of the director. It would be the last resort for the bank to recover 80% from the government. Applications will need to have 3 year forecasts with profit & loss, balance sheet and cashflow. It also appears that applications will need to show that you have applied for every other type of relief such as VAT deferment, Time To Pay for PAYE/NI and Corporation Tax, Job Retention Scheme and so on. It is unlikely that most small businesses will have the resource to prepare this themselves.
Please note any Business Interruption Loan Schemes taken out could not be used to replace current funding already in place. However they can be used to keep-up with current repayment plans that are already in place but it is not recommended to take on a loan to pay for another loan and you should initially contact the original borrower to discuss the potential for repayment holiday.
The Welsh government are offering financial support through the Development Bank of Wales. The £100m Covid-19 Wales Business Loan Scheme is to support businesses affected by the Covid-19 outbreak. The Scheme will be available from the Development Bank of Wales for a limited period and is intended to provide support to businesses who are experiencing cashflow difficulties as a result of the pandemic by offering loans of between £5,000 and £250,000 for businesses who have been trading for at least 2 years and are experiencing cashflow difficulties. It is different to the Interruption Loan Scheme but will work ‘alongside’ it.
Further support will be offered through the Economic Resilience Fund with further details and the application process to be opened in the next few weeks.
We would recommend that you take further advice on the loans that are available to you during this period. We can provide you with corporate financial advisors who will be better equipped to do this and we do not take any commission from making referrals.