Should I get a bounce back loan?
Bounce Back loans have been a much welcome to support to so many businesses that have been adversely impacted by COVID 19. Particularly limited companies without business premises that have not qualified for support elsewhere.
100% government backed, with a 6 year payment term, 12 months interest and repayment free and 2.5% interest per annum after the initial 12 months borrowing has never been so easily accessible or low cost.
These loans are a great opportunity to get the momentum in your business moving forward by bringing in cash to help kick start the business post COVID19. There have been some great uses for these loans including investment in equipment, investing in marketing to attract new business and new staff to give much needed support to move the business forward. For some businesses it has been paying off debt and taking financial pressure off the business owner so they can concentrate on moving the business forward.
What do I need to consider?
Amount to borrow
Businesses can borrow up to 25% of 2019’s Turnover or new businesses in some cases can borrow up to 25% of their predicted turnover. Whilst the temptation maybe to borrow as much as possible, we would recommend only borrowing what the business needs to avoid putting further cashflow strain on the business in 12 months’ time.
We recommend looking at outstanding debts that you need to clear, and any investment needed and borrow that amount.
When taking borrowing it is fundamental that the business can afford the repayments. To ensure that the business can afford the loan we recommend preparing a cash forecast for the next 2 years, it does not need to be a complicated forecast, it can be simplified into listing the incomings and outgoings each month. In normal circumstances this would be a requirement of the bank to ensure that the business can afford the loan repayments. Whilst the loan is 100% government backed, the banks will be looking to recover any defaults.
Use of the loan
These loans are a great opportunity to put your business in a stronger position moving forward. Part of the self-certification is that the loan is only to be used for business purposes (directors’ loan is not one of these purposes see below). Some of the uses we have been recommending to clients are:
Paying overdue suppliers
Whilst this is clearing debt with debt paying off overdue invoices not only reduces the calls, emails and letters chasing these amounts it also removes the pressure of managing cash flow. Businesses owners are no longer in a position where they are ‘robbing Peter to pay Paul’ so they can focus their energy on moving the business forward.
Refinancing existing loans
This can be a great opportunity to reduce monthly cash outgoings, saving on interest on existing loans as well as extending the loan repayment period. One of our clients have used a bounce back loan to repay the finance agreement on equipment saving £100 per month on interest costs alone.
Investing in assets
Is there any equipment that the business could purchase that would increase efficiency or profitability? The best example I have seen of this to date is an online retailer who has used the bounce back loan to purchase a printer, this has reduced their costs by 76% as well as reducing production time, these savings not only more than cover the repayments on the loan, customers are receiving their goods 3 days earlier.
Investing in Marketing
The natural reaction for most businesses during COVID19 is to cut costs and halt all marketing activities, we do not recommend this. Halting marketing activity stops your visibility, customers are getting ready to spend now and it is fundamental that you are at the forefront of their mind when they are ready to spend. If you are not, they will go to the competitor that has invested in marketing and making themselves visible. These loans provide a great opportunity for you to be first in the queue, invested properly with the right strategy by the time the business makes it’s first loan repayment in 12 months’ time this will be more than covered by the additional sales.
Investing in Staff/ Resource Lock down has been a time of reflection for a lot of business owners, what they want from the business and to stop the constant feeling of spinning too many plates. Trying to do everything results in the business owner being the bottleneck. This loan can provide the perfect opportunity to invest in resource to free up your time be it through additional staff / resource, so that you can generate new business.
Can I take the money as a Directors loan?
In most cases we advise against this for the following reasons:
The loans are for business purposes Part of the terms and conditions of the loan that you sign up to is that it is only used for business purposes, payments to a Directors loan is not for business purpose.
The added cash flow burden on the business Taking the money personally puts additional cash burden on the business it will have to generate profits to clear both the loan account and dividends for your ongoing remuneration. For example, if you take £25,000 the business will need to generate an additional £6,250 in profits per annum to service the loan repayments.
Tax on beneficial loan If the loan you take is over £10,000 you will pay income tax on the benefit value of the loan and the company will pay employers NI. A higher rate tax payer borrowing £25,000 will pay £250 in tax and the company will pay £86.25.
S455 Corporation Tax Charge If a loan over £10,000 is not repaid within 9 months of the financial year end there is a corporation tax charge of 32.5% of the loan value, so a loan of £25,000 would incur a charge of £8,125.
The additional outgoings from points 2-4 from a £25,000 loan would be £14,711.25 in the first year. Each circumstance does differ so speak to us before taking any funds out personally
How do I get a bounce back loan?
You need to apply directly to your existing bank, if you don’t have a business bank account, we recommend opening an account through Starling and going onto the waiting list. It will take time to process due to the level of demand at the moment.
I’ve applied for a Corona virus Business Interruption Loan (CBIL) can I have a bounce back loan as well?
You can only have one or the other, but if you have a CBIL you can transfer this to a bounce back loan. Some clients have found that the interest rate on the bounce back is lower so have transferred as it was more cost effective.
Can I repay the loan early?
The loans can be paid back early without any early repayment charges.
When do I need to apply by?
The scheme is open until 4th November 2020 so you have until then to complete the application with your bank.
Do I qualify for a bounce back loan?
There are certain industries that don’t qualify for the loan, they are also only available to businesses that have been adversely effected by COVID19. Full details can be found here.
In summary bounce back loans can be a much needed lifeline for small businesses if used correctly, if you need any help or support in deciding if a bounce back loan is right for you please get in touch.