'Bounce back loans' – help for small businesses and income support for those missing out elsewhere, eg, limited company directors and self-employed
Small businesses struggling due to the coronavirus can apply for a 100% state-backed loan worth up to £50,000, with no interest charged or repayments needed in the first 12 months. More than 1.26 million 'bounce back loans' have been issued and recent changes mean you can extend the length of the loans to 10 years, though if you want to apply it's best to go NOW and not leave it until the Monday 30 November deadline. Here we take you through the loans, bank by bank, and how they can be used to provide income support for those who aren't covered by other schemes – plus the Treasury answers your questions.
In this guide
The Bounce Back Loan Scheme was launched because of fears small businesses couldn't access coronavirus funding quickly enough. While at MSE we don't normally cover business loans, Martin made an exception here, because he believes it provides a potentially useful backdoor support system for those who have fallen through the gaps of other measures. For example, if you're self-employed but don't qualify for the Self-Employment Income Support Scheme, or for limited company directors (see Martin's limited company directors' help video too).
Bounce back loans are separate from the Coronavirus Business Interruption Loan Scheme, which is for larger amounts, but not 100% state-guaranteed. If you've already applied to that you can apply to have it switched to this scheme if you prefer.
In September, the Chancellor announced more flexibility for repaying bounce back loans under the 'Pay As You Grow' Scheme – meaning new and existing borrowers can choose to extend the term of their loan to cut monthly repayments. Businesses can also take payment holidays or have periods where they make interest-only payments.
Here's what you need to know about bounce back loans:
- You have until Monday 30 November to apply, but DON'T delay. The deadline was Wednesday 4 November, but this has been extended to the end of the month. However, most lenders will require you to book a background-check appointment before the deadline, and these slots are running out fast – if you want to apply, you should go now and not leave it until 30 November.
- You can borrow between £2,000 and £50,000. Though the amount is capped at 25% of your total turnover (usually for calendar year 2019, or new businesses can estimate).
- No interest will be charged and no repayments will need to be made in the first 12 months.
- After 12 months, all banks will charge a fixed 2.5% annual interest. This is far cheaper than a typical personal loan.
- You can repay the loan early without penalty. Or with some banks you can part-repay or overpay.
- The loans can now last for 10 years. So that's a year interest-free and the rest at 2.5%. The loans were originally set up to last for six years, but this has now been extended to 10 – which the Government says could cut monthly repayments by almost half, though you will end up paying more interest. However, you can repay at any time without paying a fee, which gives you flexibility – and of course, the sooner you repay once interest is charged, the smaller the overall cost. See how the loans are repaid.
- You can now take a payment holiday and/or interest-only periods of up to six months. This includes the option to:
- Move to interest-only payments temporarily up to three times, with each interest-only period lasting up to six months, and/or
- Take one payment holiday over the length of the loan, where you pause repayments entirely for up to six months. You can only use this option once you've made at least six payments (whether capital and interest or interest only).
Remember that you'll end up paying more in interest overall if you use one of these options.
- The loans are unsecured. While this sounds bad, it's actually good. Secured loans include mortgages, where the lender can take your home if you don't repay. Here you don't give security (the Government does) so it's far more difficult for a credit provider to take your assets if you can't repay.
- Your business must have been established before 1 March 2020. It must also still be trading as a going concern at the point of application (temporary cessation due to coronavirus doesn't matter) – and the reason for any issues must be due to coronavirus.
- Credit ratings (business or personal) won't affect your eligibility – so most people should be able to get these loans. You don't need to prove the viability of your business and the application process is straightforward.
- The loan will likely go on your business credit report, but not on your personal one (though banks may do 'soft' credit checks on both).
- You apply for a bounce back loan via a bank – at least 14 are offering them. See full bank-by-bank list.
- You need a business to set these up but don't need a business bank account. At least some of the banks offering these loans don't require you to have a business account with them (though it's difficult to get the loans if you don't have a business account with the relevant bank).
- Bounce back loans DON'T affect your eligibility for other Government personal support. You can still apply for a bounce back loan and get the self-employment income support grants, and you may still be eligible for universal credit.
- Bounce back loans can be used to repay existing finance. We've confirmed this with a number of individual lenders. We're still checking whether there are any that have specific terms to prevent it.
Martin's analysis: 'It’s not ideal, but you can turn these loans into your own Government income support scheme'
MSE's founder Martin Lewis said: "While millions who work for themselves are covered by the Government's income support scheme, huge swathes aren't eligible, and don't get any help. That includes those who started businesses after roughly September 2018, freelancers with only some self-employed work, those with profits over £50,000 and people who work for themselves via a limited company.
"In that case, as well as their main use to support all small businesses, bounce back loans are a potential stopgap solution to the personal income hump caused by the coronavirus economic cataclysm. Clearly this is far from ideal – these are loans, the official support systems are non-repayable grants. However, until and if something else is developed, for many this is the only show in town (though always check if you're eligible for universal credit).
"And while sadly it doesn't currently look likely that the support net will be broadened, as these are interest and payment-free for the first year, if another scheme were to launch shortly, you can simply repay it at no cost."
Nothing in the rules stops you using bounce back to support your income
"Now on to the technical. There is nothing in the bounce back rules stopping you from using the loan to support your income (though it's worth checking your own tax situation and corporate structure in case anything there limits it). However, as I know a positive "you can do this" is better than a "there's nothing saying you can't", we've got confirmation in writing from the Treasury.
"It has confirmed there are no strict rules on what these loans may be spent on, as long as it is under the banner of working capital or investment – ie, things to keep the lights on, like debt service, bills, running costs and crucially wages. And more so, again it has confirmed you can apply for this loan even if the only reason is to support your income.
"Bounce back loans are therefore a channel for help. The lack of repayments and interest in the first year makes these loans far more attractive for a struggling business or struggling business owner than normal finance. If things improve within a year, you can clear the loan before there's any actual cost – and if it takes longer and there is a cost, it's pretty cheap.
"In fact, it's so cheap compared to standard commercial lending, it is worth considering using this loan to pay off existing finance, to give yourself a year-long payment and interest holiday, followed by reduced cost in the longer term.
"Of course, my general rule is never borrow more than you need to. And in principle that is right. However, for the financially self-disciplined, there is an argument that as this is interest-free for a year, granting yourself a borrowing facility now in case it's needed isn't risky. Take what you may need, then store it in top savings (you're protected up to £85,000) and hopefully you won't use it and can then repay it at no cost before the year is up.
"But only do this if you won't use the money unnecessarily or overly liberally. If you don't trust yourself, don't do it. Only borrow the very minimum you need, and aim to repay as quickly as possible. Ultimately this is still debt, and debt's like fire – used well it's a useful tool, used badly it burns."
How in practice to get the money out to support yourself
"This is where it gets trickier. The Treasury has confirmed you can use the money to support your income, but how? And what's the tax impact? These are questions that for safety's sake, you must ask your tax adviser or accountant as it depends on your exact set-up.
"I need to be straight – this isn't my bag. My speciality is consumer, not business finance. However, I've prepared some basic info you can jump off based on conversations with one adviser (I need to double-check with multiple sources – and will update in future), but again do get bespoke help.
"The big starting point is that this loan is for working capital – for cash flow to enable you to do what you normally do, so you can use it to keep up the normal payments made. The adviser told me the main rule is "don't take the piss" – exactly what to do depends on your structure:
- Sole traders / business owners: You can take cash from the business, quite simply because you are the business. And taking the money doesn't trigger any tax, because you pay that based on profit not withdrawals. Then again, of course, as this loan is your loan, you're liable to repay it.
- Limited company directors: This is more complex. The money from the loan belongs to the company, not to you. There are three main ways owners get money from limited companies:
1. Dividends. They must be paid from profits and a loan isn't a profit. But the loan (or refinancing other loans) might provide the cash flow needed to pay a dividend, if the money is not available otherwise.
2. Salary. If you just want to cover your salary, the first thing to consider is to furlough yourself (this is being replaced in November by the Job Support Scheme), but that means you can't work, except for fulfilling your minimum statutory obligations as a director.
If that isn't for you, using the loan money to cover your salary is clearly a purpose of working capital, so that's fine. It's likely to be far trickier to argue that you can increase your salary (even to cover lost dividends) as these loans have to be used for the economic benefit of the company, not the individual.
3. A loan to a director. If there's cash in the company (for example, the loan frees up other cash) then it can be temporarily lent to a director. Yet if that loan isn't repaid within nine months, then the company will usually need to pay quasi-corporation tax at 32.5%, which is a big hit – and do watch for tax as a benefit in kind if you don't charge interest for the loan.
And that's it. Did I mention to check your situation with your own adviser...?"
To apply for a bounce back loan, you'll need to contact a bank directly and fill in a short online application. All banks charge the same 2.5% annual interest (after the first 12 months at 0%). At the moment, you'll have until the end of November 2020 to apply for a loan.
When filling in your application, you'll need details of your annual turnover, account number, the amount you want to borrow, a copy of your tax return and also to confirm that your business has been adversely affected by coronavirus.
All banks in the table below will let existing business account customers apply for a bounce back loan, so for ease, we've concentrated on what they're saying for customers who use a personal account for their business, and also whether they're accepting applications from new customers.
|Bank of Scotland||No, but need to open a fee-free 'loan servicing account'||No|
|Clydesdale Bank||You "may" need to||No|
|HSBC||No (but you'll need to have applied for a feeder account by 30 Sep) (3)
||No (unless you applied for a business or feeder account by 30 Sep) (3)|
|Lloyds Bank||No, but need to open a fee-free 'loan servicing account'||No|
|NatWest||Yes, open a feeder / business account||No
|RBS||Yes, open a feeder / business account||No
|Starling||Yes||Yes, you can apply for an account (but existing business / sole-trader customers who use Starling as their primary account get priority)|
|Ulster Bank||Yes, open a feeder / business account||No|
|Yorkshire Bank||You "may" need to||No|
(1) Refers to people who run a business through a personal current account.
(2) Some new customers have reported it taking longer than expected to become a business customer.
(3) HSBC has closed bounce back loan applications to anyone who didn't apply for a feeder or business account by 9am on 30 September.
Note: Monzo doesn't currently offer bounce back loans. And most banks state that funds should arrive in your account within days of being approved.
After the Chancellor's announcement, we asked banks whether they would continue to accept applications until the new 30 November deadline. Bank of Scotland, Clydesdale Bank, Danske Bank, Lloyds, NatWest, RBS, Santander and Yorkshire Bank all said they would still be accepting applications, and would not be changing their criteria. Starling said it was "working on what the announcement means" for its customers.
Bounce back loan lender updates
- Tide. Small lender Tide was initially offering bounce back loans, but announced in early July that it had "paused" lending and closed its waiting list.
- Lloyds and Bank of Scotland. As of 8 September 2020, the Competition and Markets Authority has now stopped Lloyds Bank and Bank of Scotland forcing small-business customers to open business accounts when applying for a bounce back loan.
If you've already opened a new business account to get the bounce back loan from either bank, you don't need to keep the account and you're free to switch to another bank at any time. If you have the bounce back loan at that point, you'll be offered a fee-free 'loan servicing account'.
If you've a personal account for your business cash with Lloyds or Bank of Scotland, and you've not yet applied for a bounce back loan but plan to in future, you'll be offered the fee-free loan servicing account from the middle of September (you won't have to open a full business account).
- HSBC. The high-street lender has now restricted bounce back loan applications to existing business customers and new customers who applied for a business, feeder or Kinetic account by 9am on 30 September (and were successful in opening one).
- Barclays. The bank closed bounce back loan applications to customers who didn't already have an existing relationship with it in mid-October. The bank added that existing personal account customers will need to apply for bounce back loans sooner rather than later as telephone appointments are running out quickly.
There is no interest or repayments in the first year.
After that, under the current system you are scheduled to make 60 repayments of the capital (the amount you borrowed). If you extend the length of your loan to 10 years, you'll be making 108 payments of the capital.
However, this doesn't work like a normal personal loan, in that you have fixed payments. In fact, the way it works is more like an overdraft facility.
Each month, you repay 1/60th (or 1/108th if you extend the loan) of the capital, plus the interest that's built up that month. That means you repay more in the first repayment month than, say, in the 30th, as the amount you owe is decreasing.
- For example, with a six-year loan, if you borrowed £25,000:
- Each month your capital repayment is £417.
- In your first repayment month you'd repay a total of £469, made up of £417 capital and £52 interest.
- By month 25, you'd pay £458 as the interest is lower.
- Pay the loan off on the agreed term over five years, and you'd pay back a total of £26,590 (ie, the capital you borrowed plus £1,590 interest).
If you extend your loan term to 10 years, your monthly repayments will be lower but you'll end up paying more interest. For example, with the same £25,000 loan, your capital repayment every month would be £231. But your interest payments will decrease more slowly, as you'll be reducing the capital on your loan at a slower rate, and you'll pay £2,838 interest in total.
But if you overpay early, even in part, the amount you owe reduces and so does the interest. Taking the original example of a six-year loan…
If you borrowed £25,000, had a year with no repayments, then made two years of repayments, you'd have paid £11,010 (£10,000 of capital and £1,010 of interest). If you then had the money to clear the loan, the lender would ask you for £15,000 more. That means your total repayment would be £26,010, saving you just under £600 compared with repaying over the full term.
Q. What if I stop trading after coronavirus, as my business is no longer feasible and running at a loss – will the bounce back loan have to be repaid if the business is not operating in 2021? What is the liability? A. "All businesses that take out a bounce back loan are responsible for repaying any facility they may take out. No business will be required to make a repayment during the first 12 months of the loan, giving them time to get back on their feet."
Q. Will loan repayment amounts be confirmed at the time of application? A. "Yes."
Q. Is there a criterion regarding minimum revenue and profit threshold? A. "You may only apply for a loan of up to 25% of your turnover, but there is no constraint on the size of business that can apply for a loan."
Q. Can the loan be paid as a dividend if the business has retained profits but is cash poor? A. "Yes."
Q. I have a small limited company that has taken out a bank loan at a high APR rate which I have to stand as a guarantor. Can I apply for a bounce back loan for the same amount to pay off the bank? A. "Yes."
Q. How long will it take for the loans to be paid from point of application? A. "If you apply to a lender with whom you have an existing relationship as a business customer, lenders will endeavour to ensure you receive the funds the following day. If you are not a business customer or apply to a different provider, this process may take more time."
Q. How long will the bounce back loans be open to applications for – for instance, what if I need help in 2021? A. "The scheme is intended to run for six months (with an option for extension should circumstances warrant it)."
Q. I am an employed part-time hairdresser on furlough, but also have a mobile hairdressing business, which I operate as a sole trader. Am I eligible for the loan? A. "Yes."
Q. Is there a date restriction on limited companies? I switched from sole trader to limited company on 9 March. I'm basically stuck in the middle of everything. A. "If you can verify that you were a sole trader before 1 March and show that your business is essentially the same as the one being carried out then, you will be able to apply."
Q. Would bounce back loans be accessible for those who only went self-employed in September? A. "Yes, provided that they can demonstrate they were established on [or before] 1 March 2020, have been adversely affected by Covid-19, are still in business at the date of the application and more than 50% of their business's income is derived from trading activity."
Q. Are 'PSCs' (people of significant control) excluded from bounce back loans? A. "No."
Q. Are limited company directors eligible for a bounce back loan? A. "Yes, if they are a sole director and applying on behalf of their business. All applications must be made by the business and the loan must be used wholly for business purposes, not personal purposes."
Q. What happens if I'm struggling to repay the bounce back loan? (Answer provided by the state-owned economic development bank, the British Business Bank.) A. "You should talk to the lender if you are experiencing financial difficulties and they will have standard processes in place to support customers in those circumstances.
"Lenders are not permitted to require personal guarantees for the Bounce Back Loan Scheme.
"For sole traders or small partnerships, who often risk their personal assets when borrowing, the terms of the Bounce Back Loan Scheme mean no recovery action can be taken over a principal private residence or a primary personal vehicle."
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