Finance support for businesses in Covid times.
Monday 18th May, 2020
The Government bounce back loan scheme has been met with much applause after the poorly thought through and disorganised original CBILS scheme.
I wrote about its extraordinary initial flaws at design, and like many commentators, I was stunned to find some banks offering loan rates of 12%, coupled with a personal guarantee where the bank was 80% protected by the Government.
Talk about having your cake, eating it, and being paid to have the cake.
Some banks do not change, but of course, banks were not given appropriate directions by the Treasury.
The Government did listen however, and altered the scheme to provide better terms to businesses.
Clearer directions on not asking for personal guarantees and the viability of the borrower have left the process much clearer for businesses.
Much has been learned from this and applied into the bounce back loan scheme, which has been met more positively by professionals and businesses alike.
The application process for a start is streamlined and applicants have to provide much less detailed information than with CBILS.
If you have been negatively affected by the coronavirus situation, are not in bankruptcy, liquidation or undergoing debt restructuring, you can apply for a business bounce back loan scheme as long as you are based in the UK.
The rate is fixed at 2.5% and with no initial set up/application or early repayment fees; it would seem a very good offer. Moreover, the first year is interest free.
Compare this to a five year fixed rate mortgage, which is secured against your home in order to reduce the rate. You won’t be successful.
From the more competitive schemes, expect to pay a five year fixed Annual Percentage Rate of Charge of c2.8% and remember, that loan is secured against your home as opposed to the bounce back where there are no personal guarantees allowed, and where recovery action cannot be taken against your principal or private residence or principal private vehicle.
Having a limited company protects your personal assets, so borrowing against a private residence should be accompanied by accountancy advice.
Those who are unsuccessful in the application or following the negative interest model (i.e. believing interest rates will remain very low) might look at the current discounted variable rate for a remortgage of 1.05% as an option, but the accompanying fees push the APRC over 3.7%.
For the unsuccessful bounce back application, such cash flow injections may be the choice between keeping a business alive or not.
Once again, advice should be taken from your accountant.
Borrowers on the bounce back scheme can apply for up to 25% of turnover in the 2019 calendar year, up to a maximum of £50,000, but remember you are responsible for repaying the loan at the end of the term.
Most applicants we have seen have had applications approved super quick and cash in the bank within one day of approval of the loan.
It is surprising what they can do when they put their mind to it.
Other options available are to look toward current savings and pension schemes to fund cash flow, but consider you are encashing your units in your fund at a deflated price after the stock market downturn.
Your pension pot should be one of your last ports of call, given its tax and Inheritance tax efficiency, and given that, it means accessing a pot that is designed for longer-term income.
There are other options available like the Covid corporate financing facility which will provide funding to businesses by purchasing commercial paper of up to one year maturity.
These are very difficult times in businesses. The situation is not helped by not knowing how long the business (traffic queue) is and whether or not it will become longer.
Guiding your way through such a foggy future is one of the most tricky and emotional scenarios I can imagine, but please take advice to take that emotion out of it.
Peter McGahan is Chief Executive of Independent Financial Adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
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