Uncovering the new Recovery Loan – A commercial look at the scheme.

Beware lenders are likely to be looking closely at serviceability and be tough on recovering  unpaid loans.

On the 31^st of March 2021, the BBLS, CBILS and CLBILS schemes closed and on the 6^th of April the new Recovery Loan Scheme (RLS) launched. The new scheme which is, again, overseen by the British Business Bank is designed to support access to finance for UK businesses as they recover and grow following the pandemic.

Jo Wilmott from The Minster Partnership Commercial Ltd in Dorset, details what Recovery Loans entail, and how they differ from BBLS, CBILS and CLBILS. As Insolvency Practitioners and Turnaround Specialists, we acknowledge the important part that the Recovery Loan Scheme will likely play in helping firms recover. However, as Jo points out, the lenders are likely to go in much harder to recover unpaid Recovery Loans, as quoted in the Mail on Sunday recently:

“HSBC, NatWest, Barclays and Lloyds have begun writing to businesses warning them that repayments on emergency support loans will soon be expected. Banks have handed out more than £75bn to 1.6m firms under several schemes set up by Rishi Sunak, the Chancellor, and are expected to spend millions on recovery. One senior banker warned that lenders could go in hard to recover debts after a recent court case found banks do not have a duty of care to borrowers who fail to repay.”

This means that firms considering applying for a Recovery Loan should explore all their options before deciding. It might well be that further loans are not the best answer.

The Recovery Loan Scheme – Key details

Most importantly, perhaps, the Recovery Loan Scheme will be driven much more by serviceability – the ability to repay the loan. This will have implications for the popularity of the scheme.

The key details are:

• Launch and duration of the scheme. The new scheme has been launched with a 9-month duration 6^th April to the 31st December 2021. The initial indication is that a review will be undertaken in the autumn to determine if/how the scheme will be extended or amended.
• The types of facilities available are: Term Loans, Overdrafts, Asset and Invoice Finance.
• Facility terms are a minimum of 3 months and maximum of three years for invoice finance and overdraft facilities for asset finance and term loans and the maximum term is six years. In certain forbearance situations there is the ability to extend up to 10 years.
• Loans and overdrafts will be available for amounts from £25,001 – £10 million.
• Asset and invoice finance will be available for amounts from £1,000 – £10 million.
• The key difference to the previous facilities offered is that there is no Business Interruption Payment which means there will be no interest free period, and the Government will not pay any upfront lender fees. Repayments will commence immediately.
• Accredited Lenders. Initially there are 18 accredited Lenders for the new scheme (compared to c.100 for the first schemes) including all the main high street banks. Some lenders are only offering some types of facilities, so you need to check on the main website. Also, as further Lenders become accredited, they will be added to the list.

https://www.british-business-bank.co.uk/ourpartners/recovery-loan-scheme/current-accredited-lenders/

• Businesses that have already received support under the existing Covid-19 guaranteed loan schemes will still be eligible to access finance under the RLS, but only if they meet all other eligibility criteria. The full eligibility rules are on the website.
• Government Guarantees. Again, the Government will provide a Guarantee to the lender of 80% of the outstanding balance of the loan. However, the borrower will always be 100% liable for the debt.
• The scheme is capped at a total facility of £10m per business and maximum of £30m per group.
• The total amount offered will be at the discretion of the lender based on underwriting criteria including credit checks.
• Personal Guarantees. For Recovery Loan Scheme facilities of £250,000 or less, Personal Guarantees cannot be taken by Lenders. For facilities above £250,000 Personal Guarantees may still be required but at the lender’s discretion. Lenders cannot request borrower’s private residence to be provided as security.
• Rate of Interest. Lenders are advised that the annual effective rate of interest, up-front fee and other fees cannot be more than 14.99%.
• A key aim of the RLS is to improve the terms on offer, but if a Lender can offer a commercial loan on better terms without requiring the guarantee provided by the RLS, they should do so.
• Businesses in Northern Ireland or groups with operations in the region, remain subject to more stringent EU state aid rules that continue to apply post-Brexit. A review of the NI protocol needs to be undertaken by the Lender.

Initial observations from some members of the commercial finance broker community

• Initial experiences indicate that applications from existing bank customers only may be taken by some high street lenders due to capacity issues in taking on new to bank customers.
• The scheme has some similarities to the previous Enterprise Finance Guarantee scheme which basically was available where a lending application met lenders criteria but did not have security to support the funding.
• Lenders criteria regarding debt service cover is still to be clarified but with lending over 6 years and if existing BBL or CBILS are in place we may see loans failing underwriting as serviceability cannot be proven even based on pre-Covid financial performance.
• The general opinion is that it would not be in a business’s best interest to refinance existing CBIL or BBL unless a RLS can be secured at more competitive pricing.
• Applicants for finance will need to provide certain evidence to show they can afford to repay the RLS facility this is likely to include the following:

Management accounts

Historic accounts

Business plan

Details of Assets

Clive Fortis of Antony Batty states “For many thousands of businesses that have managed to keep going because of Government support, the next few months are crucial. For help and advice on making the right decisions speak to Antony Batty at our Bournemouth office on 01202 923009.”