As the businesses are completely tormented by the outbreak of novel coronavirus across the globe, they are looking up to bailout packages from the governments, insurers and other financial regulators. Some of the businesses might even collapse while others continue to seek consolidation. The situation is further aggravated by steep fall in prices of crude. The global financial markets are witnessing unprecedented situations leading to one of the biggest meltdowns of the century. The government on the other hand are recording significant increase in their deficits.
Meanwhile, the UK government is helping the people by launching job retention schemes. The FCA is seeking clarity on the Business Interruption (BI) insurance policies to help businesses. The Chancellor of the Exchequer, Rishi Sunak has announced various support measures such as £7.5 billion awarded in business grants, nearly supported 4 million jobs through the job retention scheme and announced generous tax deferrals supporting hundreds of businesses. In continuation of these support measures, the UK Treasury has launched new Bounce Back Loan Scheme.
What are Bounce back loans?
Bounce Back Loans Scheme was first unveiled by the Chancellor on 28 April 2020, which opened from this Monday. The government’s idea behind this scheme is to provide quick and easy-to-access loans to small businesses. As we recover from the Covid-19 pandemic, small businesses are projected to play a key role in job creation and propelling economic growth as they form the backbone of the economy. The Bounce Back loan scheme would contain job losses and ensure sustainability of these small businesses during the ongoing economic turmoil.
Under the scheme, small businesses would be able to borrow between £2,000 and £50,000 with quick cash disbursement by applying online through a short and simple form. These loans would be 100 per cent government backed for lenders. Businesses would be able to borrow up to a maximum of £50,000 or 25 per cent of their turnover, whichever is greater.
Several Small & Medium businesses such as hairdressers, florists and coffee shops would be eligible for Bounce Back Loans to help them weather the crisis caused by the pandemic outbreak. These businesses can fill online application to accredited lenders. The accredited lenders have agreed upon an affordable flat rate of 2.5 per cent interest with the government to provide guarantee for these loans and waive off the processing charges on these loans. For the first 12 months, the businesses are not supposed to pay any interest as the government has taken the responsibility of any fees and interest incurring in that period. The businesses do not need to repay anything during this period which would help them in establishing themselves. Before the loan is disbursed to the eligible company, the company would be expected to comply with anti-money laundering (AML) and Know Your Customer (KYC) standards.
In addition, the new Bounce Back loan provides flexibility options. For businesses which have taken Coronavirus Business Interruption Loan (CBIL) of £50,000 or lesser amount have option to switch to new Bounce Bank loan scheme.
Given the prevalent economic conditions, the businesses are in dire need of confidence and flexibility to ensure business continuity. This new scheme of 100% government-guaranteed loans would allow them to trade and play an important role in rebooting the British economy. However, the borrower would be 100 per cent liable for the debt.
Banks such as Barclays, Lloyds, RBS and many others are offering Bounce Back loans. The businesses can apply online. However, there are some conditions which are supposed to be fulfilled by the businesses. The business should be based in the United Kingdom and its date of establishment should be on or before 1st March 2020. The business activities should have been disrupted by the pandemic outbreak and they should generate at least 50 per cent of their income from trading activities.
Businesses should have been in good health on 31 December 2019 and cannot file bankruptcy while applying for the Bounce back loan. Another important point to note is that a business cannot have a Bounce Back loan and other Government support scheme such as CBILS running simultaneously. However, they can always switch to Bounce Back loans from other support schemes.
What is the difference between small business loans and Bounce Back loans?
People might tend to misunderstand these two different categories and might face rejections. Small business loans are for businesses which were viable before the pandemic outbreak and are viable after the pandemic outbreak and the loan they are seeking is for the purpose of business interruption.
Bounce Back loans is offered up to 50 thousand pounds for businesses. The businesses only need to prove that they were a viable business before the pandemic outbreak.
Importance of credit in the economy
Any economy is made up of transactions. Transactions are done by people like you and me but only if we have money in our pockets. The pandemic outbreak has made the people and businesses run out of money.
Large-scale production is facilitated by the availability of credit. In order to meet the expected demand, credit stimulates and finances production. The businesses leverage on credit obtained from the financial institutions and expand their operations. Even the micro scale businesses rely on credit for production. The traders need bank’s credit to conduct their operations.
The credit greases the wheels of the business operations. Industries rely on short term credit to meet their temporary obligations while long term credit ensures their sustainability. The availability of credit needs to regulate by the central bank to stabilise trade and inflation in the economy.
The Challenges amid the pandemic
The businesses cannot plan for the end of the lockdown without a clear exit strategy issued by the government. Nobody knows how and when these lockdowns will end.
The businesses need to review their operations as to how they acquire customers and how do they deliver products & services to customers, instead of waiting for the lockdowns to end and hoping that everything would return to normal.
Life is not normal as it was hundred days ago. For individuals, social distancing and protective gear has been a part of their lifestyle now. Similarly, businesses need to understand their business models and factor in the unprecedented crisis to find the Do’s & Don’ts to conduct business operations in these prevalent conditions. Further, the Government has also pledged to continue to provide the necessary assistance and grants needed to come out of this crisis.