Running a business can feel like swimming against the tide even in a strong economy, but over the last 15 months, it has been more like trying to swim – or at least survive – in a typhoon. To help the UK economy weather the storm, the government has been throwing out ropes, floats and rafts in the form of the furlough scheme, grants, Covid Business Interruption Loans (CBILs) and Bounce Back Loans (BBLs).
This support has been a vital lifeline for many, but with those loan schemes now closed to applications, and restrictions on trade and social activities extended yet again, where can UK businesses turn now? According to the government, businesses that have been impacted by the pandemic should put their trust in the Recovery Loan Scheme (RLS).
However, since its launch on 6th April 2021, relatively few businesses have taken advantage of the scheme. Here we explore why the scheme has not had more uptake and alternative funding options for UK businesses trying to grow.
What is the Recovery Loan Scheme?
In addition to the one-off Restart Grant Scheme that is open to businesses in the non-essential retail, hospitality, leisure, personal care and accommodation sectors, the RLS will currently be open until 31st December 2021, but this may be reviewed at a later date. Businesses of any size can apply for loans from £25,000 up to £10 million, through to the end of this year, and the government will provide a guarantee to lenders of 80%.
While previous schemes were intended to help businesses survive the economic impact of the pandemic, the RLS scheme has been introduced to help viable UK businesses return to some kind of normality and grow.
Key features of the RLS
- The loans are 80% guaranteed by the government;
- Term loans, overdrafts, asset finance and invoice finance facilities of up to £10 million can be borrowed and supported by the RLS guarantee;
- The maximum value of a facility per business is the lower of (i) £10 million; (ii) double the business’ wage bill for the last year available; or (iii) the applicant’s liquidity needs for the coming 12 months (for large enterprises) or 18 months (for SMEs)*.
- The minimum facility sizes vary, starting at £1,000 for asset and invoice finance and £25,001 for term loans and overdrafts;
- Term loans and asset finance facilities are available on repayment terms of up to six years and overdrafts and invoice finance facilities for up to three years;
- For facilities for £250,000 or less, personal guarantees cannot be taken. For facilities above £250,000 personal guarantees may still be required but no recovery action can be taken over a Principal Private Residence and recoveries are capped at a maximum of 20% of the outstanding balance of the facility after the proceeds of business assets have been applied.
*The maximum a business can borrow is also subject to a limit of £30 million per borrower group but private equity and venture capital linked businesses will not be deemed to be included within the definition of ‘group.’
Why aren’t more businesses using the RLS?
In a recent article by the Financial Times RLS applications were reported to be “in the low thousands in the first week with fewer again accepted as potential borrowers”. One of the largest UK banks received “fewer than 500 applications in the first two days”, where they approved close to 2,000 applications in the same period when the bounce back scheme opened in 2020.
At Bluestone Leasing, we speak to UK businesses of every size across a wide range of sectors every day, and it is clear from our conversations that the RLS has not exactly set the world alight. What’s keeping applicant numbers so low?
Impact of CBILS
CBILS provided the lender with a 100% government-backed guarantee, there was no guarantee fee and no personal guarantee for loans below £250,000, and the government made a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees. This meant businesses benefitted from no upfront costs, no repayments for 12 months, and lower initial repayments.
Like the CBILS, no personal guarantee is required for RLS loans under £250,000. For facilities above £250,000 personal guarantees may still be required but no recovery action can be taken over a Principal Private Residence. However, in other ways, the RLS does not offer as much as the CBILS. Loans are 80% backed by the government where CBILS were 100% backed, there is no 12 month payment free period, and interest rates are standard.
Because of its attractive terms, many businesses made use of the CBILS at the height of the pandemic. Businesses may not be as interested in the terms of the RLS, and if a business did make use of CBILS, it may place a limit how much money they can borrow under the RLS.
Note: Businesses should not use the RLS to repay CBILS.
Not intended for struggling businesses
The CBILS was open to businesses that had been negatively impacted by the pandemic. The RLS, on the other hand, is not intended to prop up failing businesses that need an injection of cash to keep them afloat, but for viable businesses that have been impacted negatively or positively by the pandemic. Every lender has their own criteria when it comes to deciding whether to lend money to a business, but if a lender is in doubt about a business’ viability, they may reject their application.
Not widely available yet
Relatively few lenders are offering the RLS. To be able to offer the scheme, lenders need to be accredited by the British Business Bank, and this is taking time to roll out. The RLS is due to close at the end of December 2021 and as many lenders are still awaiting accreditation, businesses may run out of time to take advantage of the scheme. Some lenders have decided not to offer the product and those that have been accredited have only recently finalised their lending criteria.
Potentially more expensive than other finance products
Lenders are charged 1-3% on the RLS scheme. While some are choosing to cover this cost themselves, others are passing the additional cost onto the borrower, which might make it less cost-effective than other finance products.
Which businesses can take advantage of the RLS?
The RLS has the potential to help businesses that have managed to survive the pandemic, and are now ready to purchase assets and invest in growth.
RLS applicants should have strong accounts, healthy cash flow, and be able to prove that they will keep trading, even if they are in a challenging sector which has been greatly impacted such as retail, leisure or hospitality. The RLS could also be a suitable option for businesses that do not have a personal guarantee to offer.
Because it is 80% backed by the government, lenders may request that the RLS be included in a range of finance agreements to reduce their risk, enabling them to lend more money than they would have done without it.
However, the RLS scheme is not the only funding route available to UK businesses, and it is important to weight up all options before making a decision.
If not the RLS, what other funding options are there for UK businesses?
Several businesses that have contacted us about the RLS have ultimately decided to pursue a different finance product such as a commercial loan to bring in working capital, asset finance (hire purchase, finance lease, or an operating lease) to acquire assets, or invoice finance to boost cash flow.
To invest in assets…
Hire purchase: The asset is paid for by the finance company (who will want the VAT to be paid up front which can be claimed back as normal). The finance company then charge a regular payment to the end user (your business). The last payment has an additional option to purchase fee which transfers legal title to the customer. This may also entitle the business to the Super Deduction tax benefit.
Finance lease: The finance company pays the supplier for the assets, becoming legal owners of the assets. The finance company then leases the equipment back to the end user (your business). The payments are charged plus VAT which can be reclaimed as normal. At the end of the agreement, you cancel the agreement with the finance company and pay a one-off infinite rental, allowing you to do what you want with the assets.
Operating lease: The finance company pays the supplier for the equipment and in turn then becomes legal owners of the equipment. They then lease/hire the equipment back to the end user and the payments are charged plus VAT which can be reclaimed as normal.
To improve cash flow or invest in growth…
Commercial loan: The funder provides a business with a loan and in return the company makes regular repayments to cover the loan and interest.
Invoice finance: Invoice finance helps business owners leverage their unpaid invoices, giving them an instant cash injection into the business as the lender will release up to 90% of a business’s invoices straight away. When the business’ customer pays the invoice, the lender releases the remaining 10% to the business minus their fees.
Moving your business forward after the pandemic
There is no doubt that we have lived through one of the most challenging periods in our history, but when the storm has passed, many businesses will make it through even stronger than before. With determination, resilience, the right support and some financial creativity, dry land is in sight.
At Bluestone Leasing, we are an award-winning team of service-focused finance professionals dedicated to our business customers and channel partners. We are specialists in creating bespoke funding solutions that deliver tax efficient growth, often including more than one finance product.
Click here to get in touch and find out how we can help your business to move forward with a bespoke finance solution.
Please note: This article is intended as informational rather than advisory, as it is important that you seek financial advice that is tailored to your business and sector.
Full guidance on the RLS can be found here: Recovery Loan Scheme – GOV.UK (www.gov.uk).