If you’re a small business based in the UK and you’ve been struggling to trade due to COVID-19, a bounce back loan from the government could offer some well needed respite.
But as with any type of business loan, you might be wondering what you should and shouldn’t use it for.
After all, is it really sensible to use a bounce back loan to simply pay yourself as the sole director of a small limited company while your business is effectively on its knees?
Should you instead be using that government-backed money to invest in the future of the business?
What is a bounce back loan?
The Bounce Back Loan Scheme (BBLS) was introduced by the government to provide financial support to businesses struggling to operate during the pandemic.
They’re open to businesses that:
- are losing revenue or have had their cash flow disrupted due to COVID-19; and
- can benefit from up to £50,000 in finance.
The BBLS is part of a much wider range of support offered by the government at this difficult time and, back in December, they announced that it would be extended to the end of March.
So, you don’t have long to grab one, but there’s another option, which was announced during the recent budget.
The new recovery loan
During Rishi Sunak’s March budget announcement, the chancellor revealed that a new ‘recovery loan’ would soon be made available to businesses impacted by the government.
The new loan scheme will be launched on 6th April 2021 and offers loans of between £25,000 and £10,000,000. They’re only 80% backed by the government but could still be a very useful option for many businesses.
The good news is that you can apply for the new recovery loan even if you’ve already had a bounce back loan, and finance of up to £250,000 will be unsecured (therefore you won’t have to risk putting a property or some other asset against it).
The terms are pretty favourable, too; six years for loans and asset finance, and up to three years for invoice and overdraft finance. It’s unclear whether or not the loans can be used to support the income of sole traders or limited company directors, but expect further news on that soon.
The government has made it clear, however, that the money must be used for a ‘legitimate business purpose’.
But what does that mean?
What can I do with my bounce back or recovery loan?
Firstly, we can’t offer you financial advice, but we can leave you with some thoughts on how best to use any form of COVID-19 support loan from the government.
For instance, if you don’t need it to keep the business afloat, it makes sense to keep it somewhere safe, and ensure that it has the ability to help the business bring in more revenue. That might be to continue developing your product or to ensure you can carry on providing support services to your existing customers and avoid churn.
It’s also important to bear in mind that if you take any of the loaned money out of the business, you’ll probably be hit with additional personal tax, unless you repay it back within nine months (like any directors’ loan).
We suspect that the use of these loans will be looked into by the government over the next year, therefore depending on how you’ve used yours, you may decide it best to repay after the 12-month free payment period.
If you can still support yourself and your employees financially, it’s best to leave any government-backed loan for business purposes.
The clue is in the name: ‘bounce back’ suggests that you should invest this money wisely into the inner workings of your business to ensure it remains fighting fit and ready for the expected end of lockdown in the summer.
What happens when I need to start repaying the loan?
Three months before you’re expected to start making repayments, you should hear from the lender.
They’ll probably give you the following options:
- pay back the loan in its entirety;
- repay it over five years as originally planned; or
- increase the repayment period to ten years or more.
They may also offer an option to take a six-month payment holiday and there could be an interest-only period placed on the table, too.
The option you choose will very much depend on your circumstances, cash flow, and financial forecasts post-lockdown.
Do you have more questions?
If you’re still left with questions about the bounce back loans, or any aspect of your business finances, please do not hesitate to get in touch with the Trinity team.