Are Bounce Back Loans the support contractors need?

The Government’s Bounce Back Loan Scheme is now live, taking applications from small business owners who have been looking for a COVID-19 lifeline for over a month. While employees have been assisted through the Coronavirus Job Retention Scheme and sole traders are set to receive 80% of their average earnings for three months at least, thus far, limited company contractors have missed out on substantial financial support. And while it’s possible to furlough yourself as the sole director of your company, there are strict rules prohibiting activities of a commercial nature. Meanwhile, the Job Retention Scheme also fails to cover any income from dividends, making the reward too little for such great risk to the survival of your business. 

As a result, research carried out by The Small Business Academy showed that 18% of business owners are now reliant on state benefits to meet their essential living costs, with 81% recording ‘little to no’ revenue or a ‘substantial loss’ in earnings.  Meanwhile, a quarter said there’s a good chance their business will not survive this crisis.

How can the Bounce Back Loan Scheme help?

Last week, the Treasury dug deep into its pockets to unveil the Bounce Back Loan Scheme, which will allow businesses to borrow between £2,000 and £50,000 (up to 25% of turnover) for six years, with the Government paying the interest on the first year and no repayments due until after this period. Furthermore, this loan is offered at a standard 2.5% interest rate and there are also no set-up or arrangement fees.

While the CBILS (Coronavirus Business Interruption Loan Scheme) was heavily criticised for its long processing times, a low acceptance rate and cumbersome application forms, the Bounce Back Loan Scheme seeks to address some of those challenges –  the application process consists of just two pages and takes less than five minutes to complete. Additionally, there are no personal credit checks and your income is self-certified. 

The funds are expected to be available quickly and the loan will be 100% underwritten by the Government. This means if your business ultimately fails to survive, the bank will seek to recover the money from the Government and not you, the borrower. This should provide some much-needed positive news for contractors. 

Is there a catch?

It certainly appears to be too good to be true, but that’s not to say it necessarily is. And many small business owners are reportedly taking the Government up on this offer even though they have no immediate need. While you have to self-certify that you have been adversely affected by COVID-19, there’s no stipulation or guidance on how it can be spent and many are planning to utilise this cash to grow their business, rather than rescue it. Others have mooted plans to draw it back out as a wage to consolidate personal debts. One business owner we spoke to has made an application and plans to use the money borrowed as a deposit on a Buy To Let property. It’s perhaps also worth bearing in mind that the loan will not appear on your personal credit file and shouldn’t impact your affordability for a mortgage or a remortgage. 

Of course, this money does need to be repaid, and it should be noted that while limited companies drawing down this funding would be absolved from liability if their company was to liquidate, those taking this loan as a sole trader or partnership would remain personally liable. 

However, there’s a strong argument to be made that the advantages of the Bounce Back Loan outweigh the drawbacks and, for the foreseeable future at least, it could prove vital for millions of the UK’s smallest businesses.