The Recovery Loan Scheme: A Summary

The 31 March 2021 deadline for applications under the previous government-backed COVID-19 loan schemes has well and truly passed, however many businesses still need financial support as they try to recover from the economic effects of the pandemic. The Recovery Loan Scheme (the “Scheme”), announced in the Spring 2021 Budget, aims to do just that. A summary of the Scheme is set out below.

What businesses can apply for the Scheme?

Most UK business that have been affected by COVID-19 can apply for loans or other finance for any legitimate business purpose, including growth and investment. (Businesses not eligible to apply include banks and insurance companies.) Funding is available for businesses of any size, with no minimum annual turnover requirement.

“Any UK business” includes sole traders, limited partnerships, limited liability partnerships, co-operatives and community benefit societies, corporations and any other legal entity which generates more than half of its turnover from trading in the UK. However, newly established businesses may wish to consider whether alternatives such as the British Business Bank’s Start Up Loans programme may be more suitable.

Businesses which have borrowed under any of the other government-backed COVID-19 loan schemes are able to use the Scheme to refinance their existing loan scheme facility, provided the requirement meets the minimum facility size under the Scheme.

What funding is available under the Scheme?

The products available under the Scheme include:

• Term loans and overdrafts of between £25,001 and £10 million
• Invoice finance loans and asset finance loans of between £1,000 and £10 million

Can my business borrow the maximum facility?

Not all businesses will be eligible for the maximum funding of £10 million. The value of funding available will be the lesser of £10 million or a value based on the business’s wage bill, turnover or liquidity needs.

Businesses which have borrowed under any of the other government-backed COVID-19 loan schemes are still eligible to apply for the Scheme, although any amount already borrowed under the Coronavirus Business Interruption Loan Scheme or the Coronavirus Large Business Interruption Loan Scheme will reduce the amount that a business may borrow under the Scheme.

The maximum funding available per borrower group is £30 million, although private equity and venture capital-linked businesses are disregarded for the purposes of defining a group.

When will the loan have to be repaid?

Term loans and asset finance loans accessed under the Scheme are available for up to six years, while invoice finance loans and overdrafts are available for up to three years.

Are interest and fees payable under the Scheme?

Yes. Fees and interest may be payable and these will vary depending on the lender and the relevant borrowing arrangements. However, the effective rate of interest and fees cannot exceed 14.99%.

Is the Scheme government-backed?

Yes. The government will guarantee 80% of the finance in an effort to ensure lender confidence.

When did the Scheme come into effect?

The Scheme came into effect on 6 April 2021 and will be available until 31 December 2021, subject to review.

How can my business apply for the Scheme?

A list of lenders accredited to offer loans under the Scheme is available on the British Business Bank website. There, applicant businesses can search for lenders who provide the type of financing under the Scheme that is best suited to meet their financing requirements.

Will an application always be successful?

Not necessarily. The relevant lender will make a decision as to whether to grant the loan on a case by case basis. Lenders will require evidence that a business can repay the facility, which may include management and historical accounts, a business plan and details of any assets owned by the business.

The Bank of England published a statement on 6 April 2021 setting out the regulatory guidance that a lender should consider before deciding to grant a loan. The statement also highlights the Prudential Regulation Authority’s view that a lender should take into account factors such as the performance of the business prior to COIVD-19 in order to establish the strength of the business and determine its ability to repay the loan in accordance with its repayment terms and not be in default. The particular sector in which the business requesting the loan operates should also be considered to understand the long-term prospects of that business going forward.

Summary

In short, the major draws of the Scheme are:

• no turnover threshold;
• access to larger amounts of funding relative to previous schemes; and
• no personal guarantee for loans under £250,000.

With uptake of the Scheme expected to be similar to that seen with the previous government-backed COVID-19 loan schemes (under which 1.6 million businesses accessed over £75 billion in financing), its availability can only be good news for many small and struggling businesses.

Disclaimer

This note provides a general summary of the legal position in England and Wales as at 18 June 2021. It does not constitute legal advice.

For more information, please contact our Banking and Finance team.