How small businesses can apply to the government's bounceback £50,000 loan scheme

Streamlined coronavirus emergency lending system to offer cash to firms within 24 hours - what is the bounceback loan scheme, how does it relate to CBILS, and how can companies access funds?

Businesses will be allowed to apply for “bounceback” loans of up to £50,000 which can be approved after filling out a short online form, with funds deposited into bank accounts within 24 hours, the government has said.

Rishi Sunak announced the new scheme to the House of Commons on Monday amid fears that thousands of small firms faced running out of cash imminently during the coronavirus pandemic.

But what is the new scheme, how does it work, who can apply, and how?

What is the ‘bounceback’ loan scheme?

It is a new scheme for small and micro businesses who can, from 9am on Monday 4 May, apply for up to £50,000 of financing from their lender to help them through the Covid-19 crisis.

Companies can apply for a minimum of £2,000 and a maximum of one quarter of their last financial year's turnover, with a cap of £50,000. The loans will be 100 per cent backed by the government, unlike under the Coronavirus Business Interruption Loan Scheme (CBILS) which is 80 per cent state-backed.

This means that the process for applying will be significantly quicker and less bureaucratic than CBILS which has been heavily criticised for not getting money to businesses quickly enough.

The scheme is aimed at small businesses but the Treasury has not set a size limit on companies that can apply. Therefore, companies that want a small loan quickly may choose to apply for a bounceback loan rather than a CBILS.

How do I apply for a bounceback loan and how long will it take to get money?

Applications are around two pages long and are submitted through an online form from Monday. Only basic details are required to verify the company exists and is eligible. Company directors self-certify that the information they provide is correct and their lender then decides whether or not to approve the loan. Companies may be required to provide a tax return may in a small number of cases.

Only businesses that existed on 1 March 2020 can apply. Money should be in a business’ account around 24 hours after an application has been approved.

Because banks are not on the hook for losses under the scheme, they will not have to carry out their normal full credit checks and procedures which can time be consuming. Some firms had complained of being rejected arbitrarily for a CBILS loan. The new scheme should avoid that outcome.

How small businesses can apply to the government's bounceback £50,000 loan scheme

What does 100 per cent government-backed mean?

Banks will not have to absorb losses on loans taken out by companies that later cannot repay all of the debt. If a business cannot repay, and the funds cannot be recouped through normal means, the state will take a loss.

The Treasury says it is taking action to ensure that the primary homes and vehicles of sole traders (who, unlike companies, are not legally incorporated entities) are protected from any debt collection proceedings.

How much will a bounceback loan cost?

The government will cover interest and fees for the first twelve months, and businesses will not be required to repay any of the loan balance during that time. After that, interest rates will be “very low”, according to the Treasury, with a loan typically paid back over five years.

Can I apply for a CBILS and a bounceback loan?

No, each firm can only take out one or other form of loan. The CBILS scheme allows for larger sums to be borrowed – up to £5m per business – but requires a lengthier application process with more stringent checks.

However, companies that have already obtained a CBILS loan for £50,000 or less may be able to switch it over to a bounceback loan which will be 100 per cent government-guaranteed, rather than 80 per cent.

The Independent understands that a company which obtains a bounceback loan will later be able to convert it to a CBILS loan (and therefore take out a larger amount) if the application to do so is approved by their lender.

Businesses who take out a bounceback loan will still be eligible for other direct government support including grants of £10,000 for small businesses and £25,000 for hospitality businesses, as well as the furlough scheme.

Why has the government started up another, separate loan scheme?

The primary existing loan scheme, CBILS, has been criticised because many of the companies most in need of funds were being rejected or simply told not to apply as they were not eligible. One of the key issues is that a business must be deemed “viable” by a bank. Given the extraordinary economic circumstances caused by the virus and lockdown measures in place to halt its spread, a large number of businesses were simply unable to demonstrate viability.

For example, how could a catering company, reliant largely on summer events which have now been cancelled, demonstrate that it was “viable” going forward?

Mr Sunak reiterated on Monday that he wanted to preserve the productive capacity of the economy after the virus is contained. That means delivering emergency funding to hundreds of thousands of businesses so that they are in a position to start back up again as soon as possible. It is hoped that the new loan scheme will do that.

Will this fix the problem with the existing loan scheme?

The government has adapted its approach on an almost daily basis since the crisis began but it has been accused of being slow to realise the needs of small firms.

It had used the banks as the “delivery mechanism” for CBILS because they already have the infrastructure to deal with processing applications for loans. This was meant to get the money out as quickly as possible but banks have approved less than £4bn of loans so far with the need for funding thought to be many multiples of that. Some other countries have been able to get cash to firms more quickly.

under current plans, the existing scheme will not be changed.

Part of the problem is that UK lenders must cover 20 per cent of losses – and sometimes more - for funding. That finance is needed primarily because of a government-mandated shutdown of the economy so the argument is that the government should cover potential losses. Applying their normal lending criteria, banks are nervous that they will lend out billions, much of which they will never see again. Of course, these are not normal times so businesses argue more flexible criteria should be applied.

Another big problem has been reams of paperwork, with lenders asking for, among other things, forward financial projections. Firms say they have no way of being able to provide these given the uncertainty of the situation.

With increasingly dire warnings about the impact on small businesses the government has been pressured to take further action. It may well have to add to these measures in due course.