Bounce-back loans: the key questions

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Chancellor Rishi Sunak’s “micro loans” for businesses, have come under attack by businesses for no going far enough to help those struggling to get the support they needed.

The taxpayer-funded “bounceback” loans were announced in the Commons and will be available almost immediately up to £50,000, amid pressure for the state to guarantee 100 per cent of the loans.

Senior bankers say they were not told the Chancellor had set the lending limit at £50,000, and had worked over the weekend on the basis that the ceiling would be £25,000.

“The industry has been left a bit shocked .  There is now some urgent back-filling that needs to go on,” said one, who questioned whether the Consumer Credit Act would need to be amended to enable lenders to provide loans to micro-companies under the scheme.

Mr Sunak had been under pressure from Tory MPs to move quickly to provide a 100 per cent state guarantee on loans to Britain’s smallest businesses.

Mark Neath, director at the finance consultacy Old Mill said: “More government support will obviously be welcomed by businesses, but the fact that we are even having the debate about the guarantee level demonstrates that loans in some cases are not the right tool for the job.

Even the Chancellor appears to acknowledge that loans are going to be made with little prospect of them being repaid

“If a bank has assessed a business proposition and concluded that affordability is not sufficient to repay the loan, then the bank should not lend, and it would be the wrong thing for the business to borrow.

“Now the Treasury is going to provide a 100 per cent default guarantee for certain loans doesn’t alter the underlying facts that the business looks unable to service the loan and that borrowing would be the wrong thing.

“Even the Chancellor appears to acknowledge that loans are going to be made with little prospect of them being repaid.

“If that happened, such that the Government guarantee was more likely than not going to be called upon, then it begs the question why not simply give a grant and spare the banks and business owners a lot of work and ultimately stress and pain to end up at the same place?”

“The media narrative I keep reading day after day is that banks’ lending criteria are denying loans to businesses. Perhaps the story ought to read: banks’ lending criteria protect businesses from inappropriate borrowing, what is the Government going to offer instead?  I fail to see how 100 per cent guarantee is the answer.”

confusion remains around which businesses are eligible for which types of loans, and how much money they will ultimately receive

Salman Haqqi, personal finance expert at money.co.uk said the loans “may be too little too late” adding: “The delay in accessing government-backed funding means that many small businesses which rely on immediate cash flow, have struggled to stay afloat.

“Small businesses, retailers and sole traders need access to funds, and fast. The new loan system, which will be 100 per cent guaranteed by the Treasury should help. Those eligible should receive the funds within 24 hours of applying, eliminating one of the major barriers.

“But despite the additional funding, confusion remains around which businesses are eligible for which types of loans, and how much money they will ultimately receive. Plus, there are lots of businesses who are still falling between the cracks, directors of limited companies, or people who have been self-employed for less than a year who could be forced into high interest loans offered by some banks.

The latest figures stated that 16,600 loans to businesses had been approved through that scheme, an acceptance rate of 46 per cent. Of these, 9,000 loans had been paid out.

Brian Palmer, tax policy expert and former AAT President, said: “The loans underline the crisis many small firms are currently facing and therefore the Chancellor has guaranteed generous repayment terms. Loan terms are for up to six years, no repayments will be due during the first 12 months and there won’t be any fees or interest to pay for the first year.”

But he added: “The loan amounts aren’t huge, but are significant enough to be of immediate help. However, there will be some fears that when lockdown is eased, the bounce back may not be robust enough to enable small businesses to meet the repayments.