The Recovery Loan Scheme was launched on 6 April 2021. It is the latest government drive to help businesses recover from the effects of the Covid-19 pandemic.
What is the scheme?
The aim of the scheme is to help businesses with their liquidity following the pandemic. It recognises that, for many businesses, their trade has been heavily impact by the pandemic. Whether this is because pandemic restrictions affected their operation. Or simply because they have seen a fall in trade because of the pandemic.
The schemes seek to inject liquidity into businesses by encouraging lending over the short to medium term, providing them with working capital, whatever reason this is needed.
How does it work?
This is a loan scheme, rather than a grant, and is offered via regular lenders that have signed up to it. The government is not directly funding any credit. However, it recognises that banks are wary of lending in unpredictable economic circumstances and is therefore partially guaranteeing loans, through the British Business Bank, under the scheme.
A business using the Recovery Loan Scheme would do so via their usual lender, agreeing the terms with them. The lender, however, has a guarantee for 80% of the loan amount from the government. In other words, if you borrowed £10,000 but defaulted, the government would give the lender £8,000, limiting their losses to £2,000. Lenders, therefore, can lend to more businesses than they otherwise would.
A business borrowing under the scheme would see little difference to regular borrowing. A key restriction is that interest rates can be a maximum of 14.99%. Although it’s anticipated that most lending would at lower rates in any case.
Who can use it?
There is a relatively low qualification bar for the Recovery Loan Scheme. It’s open to any business that has been affected by the Covid-19 pandemic, regardless of size or industry. Businesses can access the scheme even if they have used previous schemes in the past. Such as; Bounce Back Loan Scheme, the Coronavirus Business Interruption Loan Scheme, or the Coronavirus Large Business Interruption Loan Scheme.
The eligibility criteria is so wide that (for most businesses) the key criteria will be the lender’s assessment of their ability to repay. Although the scheme is intended to make positive lending decisions more likely, it isn’t a guarantee that a loan will be offered. Borrowers will have to repay the full amount of the loan. While lenders may take slightly more risk because of the guarantee, they will not lend if they do not believe the borrower can repay.
The loans can be for any purpose, and granted as asset or invoice finance, or as an overdraft or loan. Terms can be between three months and six years and for up to £10,000,000. Although invoice and asset finance loans can only be for a maximum three years. It’s also worth bearing in mind that, since it is for lenders to participate, not every lender will offer every product.
As with any loan, you need to think carefully about how you will use it and repay it, but if you need the additional liquidity to help your business recover, it’s a valuable scheme which remains open until 31 December 2021.
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