The UK scheme of 100% guaranteed loans aimed at small businesses, so called “bounce back loans”, launched on Monday 4th May. The clearest description I have found is provided by the British Business Bank who oversee the scheme. These are six-year term loans of between £2,000 and £50,000 with a maximum loan amount of £50,000. The first 12-months of interest are paid by the government and no repayment of principal until year two. The government fully guarantees both interest and principal. The interest rate is fixed at 2.5% enough to cover loan administration costs and cost of funding. The loans are available from the 50 accredited lenders also participating in the CBILS loan scheme for businesses with turnover of less than £45mn.
The analysis of ONS and BEIS data that I have conducted for other posts and coronavirus research suggest that – once the furlough scheme is taken into account – borrowing of 10% of turnover is enough for even the most severely impacted businesses to survive 6 months of lock down/ social distancing. A low interest £50,000 loan should therefore be attractive to all those businesses under cash flow pressures with turnover of less than £500,000.
On that basis I am expecting at least 500,000 companies to apply for bounceback loans and at least £6.5bn of lending. This calculations assumes that companies to borrow up to the full 25% of turnover up to the £50,000 limit (making the same rather cautious assumptions about the impact of the lock down as in my NIESR paper; with more pessimistic assumptions about the reduction in economic activity caused by the pandemic, the number and total borrowing could be higher).
The government yesterday announced some 130,000 applications for bounceback loans in the first day of the scheme, with over 69,000 loans approved in the first day an a total value of approved loans of “over £2bn” i.e. average loan size of over £40,000.
My perspective
- The scheme is very welcome, it will prevent a lot of companies going to the wall in coming weeks.
- The relatively high loan size suggests that, at least in the first day, the smallest companies with less than £100,000 turnover (who are limited to borrowing of £25,000) are only a small proportion of successful applicants. I expect over 200,000 small companies like these to need this support, but the average loan size will then come down.
- It is still only a temporary measure. These loans have to be paid back. Even for those businesses where sales recover relatively quickly, the losses during the lock down still have to be made up. We can expect these small businesses – where they do not fail – to be financially very cautious over the next three to four years, spending little on equipment or on new hiring until the bulk of this lending is repaid.
- Some of these businesses, e.g. small intimate restaurants who cannot easily “socially distance”, night clubs, and others where close contact between customers cannot be avoided will fail. So there will be costs to the exchequer.
- This does not deal with the key problem of extension of the furlough scheme beyond end-June, the most pressing current problem in Sunak’s in tray.
I think it will be appropriate, eventually, to support this scheme with relief for those companies where the burden of debt service, even of these low interest six year loans, is limiting their ability to expand and increase employment. This though is not needed immediately. Bounceback loans are providing a welcome breathing space.