The Recovery Loan Scheme: is it making UK businesses feel better?

March goes in like a lion and out like a lamb as the saying goes. However, for UK businesses, many of which have been adversely affected by the pandemic, the end of March 2021 was more likely to see them quaking in their boots rather than gambolling like lambs. This was largely as a result of the existing Government-backed loan schemes (the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Bounce Back Loan Scheme (BBLS), together, the Schemes) which provided over £75 billion of funding to 1.6 million UK businesses closing to new applications on 31 March 2021. That, together with the PM’s announcement about the long, cautious road towards lifting lockdown restrictions, did not help alleviate the anxiety many businesses were (and still are) experiencing. Financial support was still required – where was that going to come from once the Schemes closed? Many banks remain reluctant (and, in some cases, unwilling) to lend to UK SMEs in the current environment. The Government’s help was still needed to help these businesses recover from the devastating effects of and disruption caused by the pandemic.

Help arrived in the form of the Recovery Loan Scheme (RLS), the new Government loan scheme to replace the Schemes. The RLS, which was announced by the Chancellor at the Budget on 3 March 2021, launched on 6 April 2021 and will run until 31 December 2021 (subject to review). The main aim of the RLS is to be more targeted than the Schemes and to support ongoing access to finance for UK businesses as they recover from the economic impact of the pandemic. It is designed for businesses that can afford to take out additional debt finance and can be used for any legitimate purpose, including managing cashflow, investment and growth. The RLS largely operates in a very similar way to the Schemes barring a few differences which are set out below.

How does the RLS work?

Like the Schemes, the RLS will be administered by the British Business Bank (BBB) with the loans being made available through a network of accredited lenders listed on the BBB’s website, see here. Businesses seeking a loan via the RLS are encouraged to make applications through their own finance provider in the first instance, who will in turn deal with the BBB. If a lender can offer loan finance on normal commercial terms without the need to use the RLS, it may do so. This is in line with the Government’s aim to return the market to more normal, commercial lending conditions following the cessation of the Schemes.

An RLS lender can provide a wide range of loan products, such as:

• term loans
  
  
• overdrafts
  
  
• asset finance facilities
  
  
• invoice finance facilities

Businesses can borrow up to a maximum £10 million per business (with a maximum of £30 million per group). Minimum facility sizes vary, starting at £1,000 for asset and invoice finance, and £25,001 for term loans and overdrafts.

Key features of the RLS

Guarantees

Under the RLS, and in order to encourage lenders to make loans available to businesses, the Government will guarantee 80 per cent of the loan to the lender regardless of the size. This correlates with what was offered for CBILS but is not as high as the 100 per cent guarantee which was given for BBLS loans. This may result in lenders exercising slightly more caution when considering which businesses they lend to under the RLS – even if the amounts are small. As the guarantee is provided to the lender and not the business, the business will remain 100 per cent liable for the repayment of the loan under the RLS (not just the 80 per cent).

If a business is borrowing £250,000 or less, the lender is not permitted to take any form of personal guarantee. For loans above £250,000, personal guarantees may be required (this is at the lender’s discretion), however, the maximum amount that can be covered under the RLS is capped at a maximum of 20 per cent of the outstanding balance of the loan facility after the proceeds of business assets have been applied. No personal guarantees/security can be taken or held over a Principal Private Residence.

Interest and fees

Businesses are required to make payments of interest and any fees associated with the RLS loan from the outset. Unlike under the Schemes, the Government will not be providing a “Business Interruption Payment” (where the Government pays interest and any applicable fees during the first 12 months of any loan made under the Schemes) under the RLS. Interest rates have been capped at 14.99 per cent, but Government ministers are urging and encouraging lenders to keep interest rates lower and commercially sensible in order to protect jobs and help businesses recover.

Term length

Loans under the RLS are available on repayment terms from three months up to six years for term loans and asset finance facilities and three months up to three years for overdrafts and invoice finance facilities. These terms are shorter than the “pay as you grow” ten year term option which was added to BBLS loans in February 2021.

Eligibility criteria

There is no turnover restriction for businesses accessing the RLS who meet the eligibility criteria – different to CBILS which had turnover of less than £45 million and CLBILS which had turnover of £45 million. Businesses who have existing loans under the Schemes are not restricted from accessing the RLS, providing they are eligible and any additional lending meets a lender’s affordability assessment. There were no affordability checks under BBLS which led to growing levels of fraud and concern over future defaults by BBLS borrowers. The Government has dealt with these issues / concerns by making affordability checks a requirement for RLS eligibility, but this may result in businesses unable to qualify for RLS due to this more stringent requirement.

To be eligible under the RLS, a business must meet certain criteria including (but not limited to):

• being able to self-certify that it has been impacted by the pandemic;
  
  
• save for registered charities and further education establishments which are exempt from this requirement, be UK-based in its business activity and generate more than 50 per cent of its turnover from trading activity (and be engaged in trading activity in the UK at the time it draws down the loan);
  
  
• have a borrowing proposal which would be considered viable by the lender; and
  
  
• not be in collective insolvency proceedings (unless the business is in scope of the Northern Ireland Protocol).

All eligible businesses will be subject to standard customer credit, fraud, Anti-Money Laundering and Know Your Customer checks. Lenders may, but are not required to, disregard any concerns over a business’ short-to-medium term business performance due to the uncertainty and impact of the pandemic.

Businesses which are not eligible to apply for an RLS loan are banks, building societies, insurance companies, public-sector bodies and state funded primary or secondary schools.

So far, so good?

The word on the street is that take-up of the RLS has been slow. Many blame the more stringent eligibility criteria and higher interest rate charges. Some businesses report that they have been struggling with the application process as well which has prompted the chief of external affairs at the Federation of Small Businesses to urge the Government and the banks to conduct a review to ascertain whether the application process could be streamlined and the minimum loan threshold of £25,001 reduced. A mad rush by businesses applying for both CBILS and BBLS loans before these programmes ended in March 2021 also left demand for additional debt low. Supporters of the RLS believe that lending volumes will increase as more lenders become accredited through the scheme (there are currently 23 accredited lenders at the time of writing).   

Commentary

There is little doubt that the RLS came as a huge relief and a welcome move for many UK businesses.  The RLS simplified and streamlined the Schemes into one single scheme for businesses of all shapes and sizes. However, one size may not necessarily fit all.  Several bankers have commented that there is a “perception gap” meaning businesses may expect a BBLS type loan from the RLS, but that, unfortunately, is just not how it works. The RLS is a completely different beast with tighter eligibility and affordability criteria which may leave many small businesses (especially those which have been severely impacted by the pandemic) unable to access the finance that they need. Businesses may have to consider alternative finance options where the terms may not be as favourable.

Saying that, as restrictions start to lift and the economy gradually opens back up, more businesses may want (or need) to access finance via the RLS to help them reopen and recover. The RLS is not perfect, but it is the only Government loan scheme in town at the moment. Therefore, it is essential that this support remains in place so finance can be given to the businesses which need it the most in order to recover. The Government may need to consider reviewing the RLS to ensure that as many businesses that require help now can benefit from it and (hopefully) return to prosperity. One to watch for the future.

If you require further information about anything covered in this briefing, please contact Suzanne Conticelli, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2021