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Is The Government Recovery Loan Scheme Fit For Purpose?

Throughout the heart of the pandemic, the government reacted to the needs of businesses by offering a selection of support schemes. These proved to be a lifeline for many companies that were inevitably struggling. To react to ongoing issues that many businesses are still facing, the government has recently announced a relaunch of the Recovery Loan Scheme (RLS). But is this really as good as it sounds? We break down what it’s offering and how useful it actually might be.

The furlough scheme, the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan scheme (BBLS) were undoubtedly a life saver for many businesses during what was probably the most difficult time of a generation. There was also the unfortunate and unforeseen consequence of these measures being a method of obtaining easy money by fraudsters, but there is usually a downside to any story.

For larger companies, the CBILS meant they could borrow up to £5million and for smaller companies the BBLS meant that businesses could borrow up to £50,000 provided that this represented no more than 25% of their turnover.

What was particularly important was that the CBILS was supported by an 80% government guarantee in the event of the insolvency of the borrower.

It would be fair to say that the BBLS initiative was a resounding success – in that it got money out to smaller companies very quickly at a time when their future was very much in doubt.

In addition, with the BBLS borrowers didn’t have to start paying back the loan for 12 months, and then had at least six years to repay it with a fixed interest rate of 2.5%. Only large companies get anywhere near that rate of interest, and so in inflationary times such as now it was seen by many as free money.

But perhaps the most compelling feature of the BBLS was that directors didn’t have to give any form of guarantee for the debt. The lack of personal guarantee meant that those who weren’t sure whether their businesses were going to survive the pandemic could take a risk free punt on their short term future, with no fear of a comeback (except where the money had been obtained fraudulently).

Recovery Loan Scheme
With both the CBILS and the BBLS no longer available as options for businesses, the new look Recovery Loan Scheme is now being touted as a replacement. Advertised as continuing support for the recovery of small businesses, this relaunched scheme will be funded up to £3billion per year pot of money and will supply funding up to £2million to businesses. Currently it’s only envisaged that the scheme will last until 2024 (although some pundits believe that there will be the opportunity for treasury backed loans for many years to come).

While this sounds like a lifeline for those businesses that continue to struggle, the small print isn’t quite as black and white as the previous measures offered. These new loans will be backed by a 70% government guarantee, however borrowers will firstly have to offer a personal guarantee. Directors will be personally liable for any default payment before the government backstop is triggered. The details of exactly how this mechanism will work are not yet available, but the purpose of the guarantee is to deter criminals from applying for the loan in the first place.

By comparison to the BBLS (£47billion), the RLS is relatively small beer, and is clearly taking into account some of Lord Agnew’s comments about the BBLS debacle: “One of the most colossal cock-ups in recent government management.”

The government is hoping that lenders will line up to lend the money to businesses of course. But the question actually remains as to whether they will or not. Unlike the BBLS which had a fixed interest rate of 2.5%, the RLS is going to be rolled out at market rates. With more interest rate rises on the horizon, it’s likely that the interest rates are going to be no better than a “normal” commercial loan. Without the 100% guarantee from the government, we have to question whether this will be an attractive loan to a struggling business or not.

By far and away the most important part of this scheme, however, is those companies actually seeking funds. Given that the interest rates are going to be at market rates, and given that the directors will have to give personal guarantees, what is the RLS actually doing over and above the usual suite of lenders in the market?

Arguably, the BBLS was a licence to print money for the unscrupulous, and with hindsight we can see that the ease of which money was doled out with the lack of checks led to widespread fraud.

In comparison, the government seems to have swung the pendulum too far the other way, and now this scheme appears to be offering very little in the way of business support at all and smacks of grandstanding, when in reality it’s not worth anything to businesses.

With the relaunch set to commence this month (August 2022), it remains to be seen how popular this scheme will be and how useful businesses will find it. It’s certainly not easy at this point to believe small businesses will be flocking forward to take advantage of it, and we would urge any business looking into this to ensure they read all the small print around it to save themselves from any future liability.

If you’re facing financial difficulties, we would always encourage you to seek professional advice first before making any significant decisions.