Recovery Loan Scheme
In this note, we take a closer look at the most recent iteration of the UK government’s financial support scheme: the Recovery Loan Scheme (RLS), the successor to the CBILS and other debt support schemes.
Since the beginning of the Covid-19 pandemic, governments around the world have engaged in unprecedented levels of fiscal stimulus in a bid to support businesses and protect employment. In the UK, a core element of this support has been delivered in the form of a series of government-backed loan schemes made available to businesses via intermediaries such as banks and alternative finance providers. By the end of March 2021, over £75bn in funding had been approved under these schemes, as hundreds of thousands of businesses took the opportunity to secure cheap debt on attractive terms. The availability of these schemes undoubtedly spared many businesses from insolvency during the pandemic, but nonetheless has created a significant debt burden that will linger on corporate balance sheets for the foreseeable future.
LGB, in our capacity as arrangers of debt securities and debt advisers to SME and lower mid-market companies, expect to be dealing with these schemes for the foreseeable future. It has therefore been important for us to understand their characteristics and follow their development.
The RLS was launched by the British Business Bank on 6 April 2021 and is designed to provide financial support to businesses across the UK as they continue to recover from the Coronavirus pandemic. The scheme is due to run until 31 December 2021 and was introduced to coincide with the expiry of the three previous government-backed business loan schemes – namely:
- the Bounce Back Loan Scheme (BBLS);
- the Coronavirus Business Interruption Loan Scheme (CBILS); and
- the Coronavirus Large Business Interruption Loan Scheme (CLBILS).
The RLS shares a number of features in common with CBILS, but with some modifications that make the scheme more of a “one-size-fits-all” offering which covers smaller businesses with funding needs that would otherwise have been captured by the BBLS programme, while also doubling the CBILS loan limit to accommodate some larger borrowers.
As was the case under CBILS, accredited lenders are able to provide the same range of funding solutions (term loans, revolvers, invoice finance and asset finance facilities) to prospective borrowers with the benefit of an 80% government guarantee over the loan principal. The guarantee can only be taken advantage of if the lender can demonstrate that all reasonable attempts at recovery have been made. Similarly, loans of less than £250,000 do not require a personal guarantee from the borrower, while for any loan over £250,000, the requirement for a personal guarantee is at the lender’s discretion. The table below provides a comparison of the key terms of RLS and CBILS:
Generally speaking, the new programme is less generous to borrowers than its predecessors. For instance, borrowers under both CBILS and BBLS paid no fees or interest for the first year and were subject to less stringent credit checks when submitting an application. By contrast, loans written under the RLS do not provide any direct financial incentive to borrowers but rather are structured to incentivise lenders to extend credit to businesses at rates they would otherwise not have been able to in the absence of the 80% principal guarantee. Borrowers therefore stand to benefit indirectly as the result of cheaper funding being made available, but nonetheless will no longer have any interest or fees paid by the government under the RLS and remain 100% liable for any debt taken out.
The one area where the new scheme is more flexible is the removal of the minimum turnover limit on borrowers (together with a reduction of the minimum loan size).
All finance providers who were already accredited as CBILS lenders have been invited by the BBB to apply for accreditation under the RLS. Take-up of the new scheme has been somewhat slower than was the case when CBILS was launched, owing in part to the greater level of scrutiny applied to borrowers under the scheme and the less attractive terms. Unlike with CBILS, the BBB is only announcing which lenders it has granted authorisation to once they are in a position to start lending under the scheme. Only 18 lenders – most of which are high street banks – were accredited when the RLS was launched at the beginning of April, compared to over 100 lenders that were on the roster for CBILS at its launch. Currently, there are 44 lenders being promoted by the BBB on its website, though this number is increasing steadily, giving borrowers access to a broader range of products.
There is some concern among lenders that brokers may encourage prospective borrowers to apply for RLS loans as a way to avoid having to give a personal guarantee. Clearly there is an incentive for business owners to take out loans or refinance existing debt into RLS facilities without guarantees, potentially introducing an element of moral hazard whereby they are encouraged to take on more risk in the absence of any personal liability should things go wrong. This kind of informational asymmetry could ultimately serve to undermine the scheme and create distortions that cause lenders to raise the cost of borrowing to offset the perceived risks involved. It is yet to be seen whether or not this will prove to be a material problem for lenders under the RLS.
Though the RLS in its current form is due to expire at the end of 2021, it may be difficult for the government to wean businesses away from this type of finance. Extensions or adaptations to the scheme are likely to be introduced beyond 2021 as businesses continue their recovery from the pandemic, and further intervention could be needed if there is a requirement for restrictions to be reintroduced in the future. In our capacity as an adviser and arranger of debt securities, LGB expects to play an active role in the refinancing of these facilities for years to come.
LGB works closely with and arranges funding for a number of UK finance businesses which have been accredited for lending under government-backed lending schemes, including the RLS. In acting as a trusted adviser to both borrowers and lenders under these programmes, LGB benefits from a unique perspective on this area of the SME credit landscape which we are able to apply to our dealings with all current and prospective clients.