The Recovery Loan Scheme (RLS) was announced by Chancellor Rishi Sunak in the 2021 Budget last month as the replacement for the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounceback Loan Scheme (BBLS), both of which are now closed.
RLS is pretty good, but it’s not as good as CBILS or BBLS. Under those schemes, the UK Government picked up all the arrangement fees and the first 12 months of interest. That’s no longer the case with RLS. However, the government guarantee still applies, as does the exclusion of any personal guarantees for loans under £250,000.
So, how does it work?
RLS is open to all businesses, including sole traders, limited companies and partnerships. You must generate at least 50% of your turnover from the sale of goods or services in the UK. There are a few exclusions, but it’s banks, insurance companies, state-funded schools and the like, so not really an issue for most entrepreneurial businesses.
Facilities start from as small as £1,000 for asset or invoice finance, and from £25,001 for overdrafts or term loans. Like CBILS and BBLS, the loans have certain caps. There is an overall maximum of £10 million, but otherwise the cap is based on:
- Double your 2019 wages bill, or
- 25% of your 2019 turnover, or
- Your business’s demonstrable liquidity needs for the next 18 months. The wording on this is limited, but it looks like you’ll need to produce a solid set of financial forecasts if you opt for this measure as the cap.
Note that, like CBILS, the decision whether to lend is being taken by your bank just as it would be for a normal commercial loan. There is no light-touch online application like we had for BBLS. Any application for RLS will go through your bank’s normal credit approval process. That means you’ll need to share with your bank historic published accounts, current management accounts, a business plan and details of any assets in the business. If you have taken out a CBILS or BBLS facility, or have any other debt funding, this will be included in your bank’s decision about affordability when assessing the size of facility that they will offer.
You can borrow under the overdraft and invoice finance lines for up to three years, whilst asset finance and term loans are up to six years in length.
The decision on whether to lend or not rests with your bank, and they will set the exact terms of the deal, including the interest rate. There is an interest rate cap of 14.99%, which sounds really high to me, although statements from the Chancellor and the Business Secretary, Kwasi Kwarteng suggest that the banks are being encouraged to keep rates as low as possible. We’ll see how that one pans out. Don’t expect a 2.5% rate like you would have had under BBLS.
You will also have to pay any loan arrangement fees.
I run a startup business, how can I qualify?
Interestingly, the British Business Bank makes specific reference to its Start Up Loans programme (https://www.startuploans.co.uk/) which is available to businesses in their first two years of trading. You can borrow up to £25,000 at a fixed rate of 6% per annum, with up to 5 years to repay the facility. If your business meets these criteria and 25 grand is enough, this looks to be a much easier route than going through the RLS process.
They also offer 12 months of free mentoring and access to a range of business courses through the Open University.
What about defaults and personal guarantees (PGs)?
For RLS facilities under £250,000, it’s the same deal as under CBILS. The banks are not allowed to take a PG. That’s good news. For facilities over £250,000 the banks can require a PG, but there are a few sweeteners. The most important one is that banks cannot take your main home (principal private residence). That remains safe.
There’s a complex structure for the rest of the PG in the event you cannot repay the loan. In simple terms, let’s say you borrowed £600,000 and were able to make repayments of £150,000 before defaulting. So there’s a balance of £450,000 owing. Let’s assume the bank can recover £70,000 from assets within the business (they will put debentures in place to ensure this), leaving an exposed loss of £380,000. Under the PG, the bank will be able to come after you for 20% of this balance, or £76,000. The government covers the remainder.
All in, PGs under RLS represent a good situation compared to normal lending facilities where you would be on the hook for everything. They can’t take your main home, and the government picks up 80% of the default loan balance with you footing the bill for 20%.
Should you refinance your CBILS or BBLS loan with a new RLS facility?
This is allowed under the scheme, but quite frankly it would be stupid to do it. If you have a BBLS or CBILS facility you benefitted from the government picking up all the arrangement fees and the first year’s interest. If you refinance, the bank will charge you the arrangement fee on the whole lot, and in terms of interest rates, they are definitely not going to be as attractive as BBLS rates although could well be competitive with CBILS rates. Having said that, don’t be surprised if your bank tries to suggest it, as they’ll earn another set of fees.
I would not recommend refinancing CBILS or BBLS.
Which banks are offering the RLS facility?
At present there are 18 banks listed on the British Business Bank’s website as being accredited. As with CBILS and BBLS, no doubt more will be joining. At present it’s the usual high street lenders and a few regional banks, but at the time of writing none of the fintech banks (Starling, Tide, etc) are on the list. No doubt that will change.
Conclusion
As I said at the beginning, RLS is pretty good, but it’s nowhere near as good as CBILS and in particular BBLS were. But those schemes are gone now, so this looks like the best deal on the market.
If you need funding and can produce the necessary documentation for your bank to support your loan application, then this is still better than a traditional loan. RLS runs until 31 December so you don’t need to rush, but it’s unlikely there will be anything better coming on stream after 2021. This is probably your last shot at Covid-related, government-supported lending. If you need it and can justify it, then go for it.
If you need help preparing the documents and forecasts for an RLS facility, reach out to me on dbh@addthenmultiply.com
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