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Small business gets 100% state-backed loan lifeline

Chancellor Rishi Sunak unveiled a new 100% government-backed loan scheme which will provide loans of up to £50,000 for small businesses from Monday.  

28th Apr 2020
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The Chancellor is interviewed by BBC News
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The Bounce Back Loan Scheme will enable small businesses affected by the pandemic to borrow between £2,000 and £50,000 in an initiative described by the Chancellor as “an easy solution for those in need of smaller loans”.

Sunak assured the House of Commons on Monday that businesses will only need to apply through a short, standardised online application and will get the loans within 24 hours of approval.

“There will be no forward-looking tests of business viability; no complex eligibility criteria; just a simple, quick, standard form for businesses to fill in,” said Sunak.  

Businesses can apply for 25% of their turnover and the government will pay the interest for the first 12 months.

Much to chagrin of businesses and accountants who have cried out for the government to underwrite CBILS, Sunak “remains unconvinced” and doesn’t think it is “appropriate” to provide blanket 100% guarantees.

Sunak highlighted how the £50,000 cap would reduce the risk to the taxpayer while still helping the smallest businesses. “We should not ask the ordinary taxpayers of today and tomorrow to bear the entire risk of lending almost unlimited sums to businesses who may, in some cases, have very little prospect of paying those loans back – and not necessarily because of the impact of coronavirus,” he told the Commons.

Amongst other gripes, accountants and businesses have criticised banks for being slow to approve CBIL applications and being too complex.  

However, the government is exploring other avenues to speed up the CBILS applications process. These additional steps include removing the per lender portfolio cap for the government guarantee and changing the viability tests – banks will just need to know if the business was viable before the pandemic.

The chair of the Treasury Committee Mel Stride said the success of the new scheme depends on the actions of lenders: “It is essential, therefore, that there is full and regular transparency on the progress of this scheme in order to get this further vital lending out the door fast.”

The Bounce Bank loan scheme joins other government initiatives for coronavirus-hit businesses, such as the existing Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS).

But as AccountingWEB member Ireallyshouldknowthisbut... discovered when investigating the application form, businesses will be unable to claim if they have an existing loan. There is also no reference to any personal liability.

“If there isnt any, then it will be ‘free money’ if you are going down the tubes,” they noted.

Responses to the new Bounce Back scheme have been positive. Mike Cherry, the chairman of the Federation of Small Businesses, deemed the “crucial new initiative” a “decisive intervention from the Treasury and Business department”, but added that “swift delivery is now key”.  

CBI Director-General Dame Carolyn Fairbairn ramped up the pressure on banks: “Thousands of businesses could be saved by this lifeline. Banks now need to continue their work in overdrive to get the loans flowing faster.”

Labour shadow business secretary Ed Milliband also welcomed the 100% underwriting, but still had some concerns: “Jury is very much out on SMEs requiring more than £50,000 in loans as well as challenges facing those for whom debt doesn't work. This will only become more pressing,” he tweeted.

Replies (15)

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By Justin Bryant
28th Apr 2020 17:05

Being cynical (some might say sensible), what's to stop someone with a Ltd borrowing (as much as they can), and then paying themselves (and/or their wife/family) a dividend or bonus etc., and then just walking away from the Ltd and setting up as a new Ltd (if they want to) and leaving the taxpayer in the lurch? Furthermore, why would you not advise such clients to do exactly just that if they are legally able to (and desperate for the dosh) assuming there is no obvious downside? (Free money indeed.)

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By NH
29th Apr 2020 09:34

Exactly, my advice to clients so far has been, obviously wait to see what the terms are, but especially if the interest rate is low and there are little or no early repayment charges, grab as much as you can.
I am also thinking of those that already have other borrowings on high interest rates.

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Replying to Justin Bryant:
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By philaccountant
29th Apr 2020 10:22

We're probably teetering on the edge of a global depression here. If this scheme saves a large percentage of businesses that take out loans and a few chancers take the money and run I'd say that's a good outcome. Much better to get the money out there before businesses go bust and worry about the consequences afterwards.

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Replying to philaccountant:
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By Justin Bryant
29th Apr 2020 11:05

As for a global depression, the UK stock market says different and is currently on the edge of a bull market I read this morning. Just goes to show how wrong these talking head economists are. (Not that that makes any difference to the above analysis of course.)

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Replying to Justin Bryant:
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By Michael C Feltham
29th Apr 2020 11:37

@Justin Bryant

What on earth does the FTSE 100 have to do with the real UK economy on Main Street? The vast majority of corporations quoted are foreign owned.

Last time I checked there was not one SME quoted! This is critical because UK SMEs generate nearly 50% of private sector GDP and circa 48% of Private Sector employment.

As one point of reference, prior to the Wall Street Crash in 1929, brokers were bigging up the market with the old scam "Buy now folks, whilst its cheap!"

Despite the then drivers of the market's rapid growth, automotive and radio manufacturers having been issuing profits warnings for two years or so.

The day that "The Markits" actually understand anything to do with business, economics etc, will be the day Hell freezes over!

Their main activity is churning; i.e. buying and selling what already exists.

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Replying to Michael C Feltham:
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By Justin Bryant
29th Apr 2020 13:43

Well, if you look at the Great Depression the global stock markets were hardly in rude health for a number of years were they, so I would assume the two are correlated to a large degree. My guess is the stock market is pricing any problems as short-term/temporary and if not that governments will simply money print away the problems - so as not to expect a full-blown depression.

The stock markets are certainly storming upwards today, that's for sure.

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Replying to Justin Bryant:
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By johnhemming
29th Apr 2020 19:04

Apart from Michael's point the markets also take into account announced government policy. If the government had decided to simply let everyone go bust, that would affect how people perceive the value of various stocks.

The government have to try to maximise the recovery. Perhaps between a third and 40% of the GDP changes are reflected in the government's finances. Hence if we have a GDP that is 10% lower the goverment will also have a deficit of say a third of that. The GDP in cash terms is about GBP2tn.

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Replying to Justin Bryant:
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By booksy
29th Apr 2020 13:17

Erm because that would be against the Companies Act or whatever it's called - you can't pay a dividend out of non existent profits?

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Replying to booksy:
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By Justin Bryant
29th Apr 2020 13:41

Erm, read my comment (properly) re bonuses etc.

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Replying to Justin Bryant:
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By booksy
29th Apr 2020 16:00

Erm I just did and I still think the idea is iffy - you're not supposed to pay yourself or your wife or your kids or any other shareholder, dividends out of non existent profits - the govt is backing loans here not providing income. Point out to me where I'm wrong don't just tell me to read things again ffs

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Replying to booksy:
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By Justin Bryant
29th Apr 2020 16:54

You're wrong in thinking you need profits to pay bonuses etc. Otherwise start up companies etc. would not be able to pay their staff salaries would they? I am assuming there (probably wrongly) that you've read my above comment properly.

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By markabacus
29th Apr 2020 10:30

I would hope most people would have higher morals than this but no doubt as always there will be some out there who will do/try to do this.

I usually console myself with 'what goes around comes around'

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By FirstTab
29th Apr 2020 10:35

"what goes around comes around" Unfortunately life does not work this way.

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By meadowsaw227
29th Apr 2020 11:28

Why on earth would you give money to anybody without some sort of guarantee ? .
If you read AccountingWEB enough, Accountants on here wouldn't dream of doing it ! .
Some wanting money upfront with no chance of a refund - interesting .

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By johnhemming
29th Apr 2020 19:06

It is, however, no more than 25% of turnover. Hence to get the 50K there has to be a history of a trading business of some form.

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