By Sam Lockwood, Head of Funder Marketplace at Swoop
In case you missed it, here is a summary of Swoop’s webinar on May 12th where we discussed the ongoing impact of the Coronavirus Business Interruption Loan Scheme (CBILS), the Recovery Loan Scheme (RLS), and other key trends across the funding marketplace.
Watch the complete webinar here.
The ongoing impact of CBILS
The Coronavirus Business Interruption Loan Scheme (CBILS) was introduced at the height of the pandemic to provide financial support to smaller businesses across the UK that were losing revenue.
But while the scheme closed to new applicants on 31 March 2021, it’s not a completely done deal. On the final day of the scheme, many of our lenders reported receiving a month’s worth of applications and as such there’s been a delay in getting offers out.
On balance, while there will be a number of winners, there will inevitably be businesses who miss out on this final round of CBILS, and they may need to look at the RLS in greater detail.
How the Recovery Loan Scheme works
The RLS launched on 6 April 2021 and is set to close on 31 December 2021, “subject to review”.
Lenders are free to set their own credit policy which means that even if a business meets the scheme’s eligibility requirements, it may not be able to apply if it fails to hit lenders’ minimum requirements.
Under the scheme’s eligibility requirements, a business must meet certain criteria including:
- Be able to self-certify that it has been impacted by Covid-19
- Be UK-based in its business activity and generate more than 50% of its turnover from trading activity (registered charities and further education establishments are exempt from this requirement)
- Not be in collective insolvency proceedings
- If a lender can offer finance on normal commercial terms without the need to make use of the scheme, they may do so.
Businesses can borrow from £25,001 to £10 million for term loans and overdrafts, or £1,000 to £10 million for invoice finance and asset finance. Interest (and fees) must be paid from day one under the RLS because the British Business Bank (BBB) will no longer pay your interest and fees for the first 12 months.
How the RLS can be used
Some businesses have asked us whether the RLS can be used to fund construction or buy land for development. A RLS facility can be used for any legitimate business purpose including, but not limited to, managing cashflow, or for investment and growth purposes.
However, remember this will be up to the lender’s appetite and credit process. This means that lenders who do a lot of construction or development finance who are accredited under RLS should be able to offer this. But this is complex, and different lenders may end up approaching this in different ways.
Key considerations for businesses that have taken on debt
As of April 2021, £75bn of loans has been backed by the government as part of the £350bn wider support package. With this unprecedented level of lending, it’s fair to assume that a typical UK business is carrying more debt today than it has in previous years and many businesses will have borrowed significant sums for the first time. Repayments for the first loans taken out are due to kick in any day now, which means businesses may be faced with cash flow pressures they’ve not had to deal with before.
One of the key areas affecting business cash is working capital. Whether a business has positive, negative or neutral working capital will impact how cash is absorbed or unwinds in a decline or as it looks to grow.
The majority of government guarantees have been issued against term loans, which may be the right choice for many businesses. But as businesses open up again or look to grow out of this, they’ll need to balance longer term debt with shorter term cash flow needs. Businesses may also need to look at restructuring debt. If they have unencumbered assets or a property, for example, a secured lending option may be a good choice moving forward.
Businesses should be aware that they are fully liable for repaying a government backed loan, and the guarantee is to the lender, not the business. This means that if a business is unable to repay the loan in full, its ability to secure credit in the future is likely to be affected.
How the alternative marketplace might help
Around £46.53bn had been borrowed under the Bounce Bank Loan (BBL) scheme as of 21 March 2021, and this was mainly lent by high street banks. In comparison, many alternative finance firms that would normally operate in the £1k to £50k market wrote little to no business last year.
Invoice finance firms were significantly impacted as debt was repaid and businesses opted for the government guarantee backed loans. As such there was, and is, a large amount of liquidity in the alternative finance space that lenders are keen to lend. Some of this liquidity has moved as lenders try to predict demand throughout 2021 and beyond, so it remains a dynamic market.
The real growth time for alternative finance was following the 2008 financial crisis, and we’re already seeing newer well-funded entrants into the market.
Are early-stage businesses eligible for help?
Many of the alternative finance providers are not set up to lend against cash flow forecasts and their standard minimum criteria may be two- or three-years’ trading. This means options for early-stage businesses remain limited. Start Up Loans are perhaps one alternative for early-stage businesses, but we hope there will be a small number of lenders who will look at businesses 12 months old. This will become clearer once lenders are accredited and publish their appetite.
How Swoop can help
Here at Swoop, keeping track of the market and lenders is what we do. We have excellent relationships with funders and experienced professionals who can interpret what we’re seeing. We try to go the extra mile to understand lender appetite so that businesses can waste less time applying to lenders who might turn them down and can focus on getting the right outcome instead.