Recovery Loan Scheme: The good, the bad and the ugly

On 6 April the UK government’s new debt finance programme is launching, the Recovery Loan Scheme (RLS).

The scheme replaces three lending programmes that were set up initially in the wake of Covid-19 last year—the Coronavirus Business Interruption Loan Scheme (CBILS), its larger cousin the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Bounce Back Loan Scheme (BBLS).

While lenders including Starling Bank and Funding Cirlce have indicated to AltFi that they’re interested in participating, and other lenders including Atom Bank, Barclays, Lloyds and Virgin Money have all said publicly that they plan to take part, the British Business Bank has yet to confirm which lenders will be involved.

A spokesperson told AltFi that: “The British Business Bank is inviting all existing CBILS lenders to participate in an accelerated accreditation process for those CBILS lenders that satisfy relevant criteria.”

Meanwhile, a “full accreditation process” is available for lenders who haven’t taken part in these government-backed schemes before.

But what kind of loans will be available for businesses? And is this an improved scheme for lenders taking part?

Well, as has been the case with CBILS, CLBILS and BBLS, this new scheme is very much built on the lessons of those schemes that came before it—for better or worse.

The good

The Recovery Loan Scheme will undoubtedly be the most flexible and straightforward scheme that has been introduced to-date, certainly for businesses.

Previous schemes have had strict criteria around the size of the business applying (CBILS less than £45m turnover, CLBILS over £45m turnover) along with different amounts of borrowing available at each stage.

The RLS, on the other hand, simplifies this all into one offering for businesses of all sizes and stages.

Borrowing amounts range from invoice financing as little as £1,000 all the way up to term loans of £10m.

Terms are at the longer end of what has been offered so far, at up to six years, just shy of the ‘pay as you grow’ 10 year term option recently added to Bounce Back Loans.

Finally there are no personal guarantees on loans of up to £250k, and interest rates are capped at 15 per cent—again all lessons learnt from the launches of CBILS and BBLS in 2020.

So far, so good.

The bad

For borrowers and lenders, the bad news is that the government is only guaranteeing 80 per cent of the loan amounts, regardless of the size.

This is in line with what was offered for CBILS, but not as high as the 100 per cent guarantee on BBLS.

What this likely means is that lenders will be more cautious on approving borrowers, even for smaller loan amounts.

This is in comparison to BBLS, which flew out the door after it launched on 4 May 2020, quickly overtaking CBILS lending, and eventually helping to support over £45.5bn in SME lending.

The (potentially) ugly

The biggest change for smaller businesses who previously might have taken advantage of BBLS, is that RLS lending is subject to affordability checks.

Without affordability checks, the Bounce Back Loan Scheme came under fire by lenders and politicians last year, with growing concern over the level of fraud and future defaults that will have to be dealt with.

Recovery loans won’t suffer the same fate. But instead, businesses, especially those who have already taken advantage of BBLS or CBILS, may find themselves unable to qualify for additional lending due to affordability.

Simon Cureton, CEO of Funding Options which helps SMEs compare lenders, including CBILS lenders, described the RLS as a “middle ground” between what came before, and the wider alternative lending market.

“The requirements of the scheme are quite stringent and, in truth, only a proportion of the market will be able to secure loans,” he told AltFi.

Wrap-up

The Recovery Loan Scheme walks a delicate tightrope between supporting tens of thousands of UK businesses attempting to survive in the midst of a huge economic crisis, whilst at the same time tightening lending criteria in order to prevent taxpayer cash from propping up failed businesses (and fraudsters).

“I'm far from convinced that facilitating SMEs taking on even more unaffordable debt is the right solution,” said John Davies, executive chairman of Just Cashflow and chairman of Association of Alternative Business Finance.

“I appreciate we are living in strange times but normally debt shouldn't be used to fund long term losses—it is there to fund working capital for growth. It is equity / capital that should cover losses.”

Another element in the debate is the fact that non-bank lenders are still struggling to secure wholesale funding—and the debate over access to Bank of England term funding still dragging on—leaving few options remaining for SME borrowers.

Still, in just a few weeks time we’ll get a first look at the lenders, and loans, which will be available to support businesses as they emerge from the huge disruption of Covid-19.