How will the UK’s ‘bounce back’ loans work?

From 9am on Monday, small businesses in the UK can apply for so-called “bounce back” loans of up to £50,000: a new form of government-backed credit that is meant to help companies through the coronavirus crisis.

Final details of the government’s bounce back loan scheme were settled over the weekend between the Treasury and the banks that will provide the credit, and lenders expect to be flooded with applications this week.

Chancellor Rishi Sunak’s latest rescue initiative for corporate Britain involves the government offering a 100 per cent guarantee on the bounce back loans to give banks the confidence to advance cash to businesses quickly.

The move comes after strong criticism by companies of the government’s coronavirus business interruption loan scheme, aimed at small and medium-sized enterprises.

Who can apply for bounce back loans and what are the terms?

Companies of any size can apply, but they are aimed at small businesses with fewer than 10 employees and at the UK’s 900,000 sole traders.

You must have been trading on March 1 2020 and must not have been an “undertaking in difficulty” as of December 31 2019. Any individual other than a sole trader or a partner acting on behalf of a partnership cannot apply.

Mike Cherry, chair of the Federation of Small Businesses, said the coronavirus business interruption loan scheme (CBILS) “has not worked for the small firms that make up 99 per cent of our business community. The new bounce back facility offers real hope in this space.”

Under the scheme, companies can borrow between £2,000 and £50,000 for up to six years. Businesses can borrow a maximum of 25 per cent of their turnover.

The government will cover interest and fees on a loan for the first year. Businesses start their loan repayments after 12 months, and the interest rate will be 2.5 per cent.

How is a bounce back loan obtained?

The same 50-plus lenders accredited by the British Business Bank, the state-owned financial institution, to provide coronavirus business interruption loans are also expected to offer bounce back loans. Ten have been accredited so far.

Companies seeking a coronavirus business interruption loan have complained about lengthy delays with the application process and stringent qualification criteria.

By contrast, applicants under the bounce back loan scheme will have to fill out a simple online form which will ask for details such as annual turnover, bank account number, the amount of credit sought, and whether the business has been adversely affected by the virus. You do not have to offer security or personal guarantees.

Nor do applicants have to stick with their existing lenders. Although the big five banks are responsible for the majority of lending, there are likely to be plenty of alternatives. These include peer-to-peer platforms such as Funding Circle, and SME lending specialists like Newable.

Stephen Jones, chief executive of UK Finance, the trade body for banks, said: “Lenders are working at pace to get the [bounce back loan] scheme up and running and we hope to see an increasing number of firms accredited from across the broad and diverse lending community to ensure [the scheme] is available to as many small business customers who wish to borrow under the scheme as possible.”

While the crisis means the need to get cash to businesses is pressing, there will be retrospective checks on applications for bounce back loans as part of efforts to minimise fraud. These will be far more likely if applicants default on loan repayments and trigger the government guarantee.

How quickly will banks be able to make a decision on a loan application and provide the money?

Companies who apply to a lender with whom they already have a business account should expect to receive the loan within days.

For companies applying through new accounts, or which are approaching a new lender, it will take slightly longer, but banks said they would work to process these loans as quickly as possible.

A business applied for a coronavirus business interruption loan and heard nothing back: can it now apply for a bounce back loan?

Yes. You can apply for up to £50,000. You can also convert an existing or future coronavirus business interruption loan of £50,000 or less to a bounce back loan.

The interest rate of 2.5 per cent on bounce back loans is expected to be lower than on coronavirus business interruption loans, which only carry an 80 per cent state guarantee for the lender.

“The minimum facility size for term loans . . . under [the coronavirus business interruption loan scheme] will increase to £50,001 to avoid any risk of confusion or overlap [with the bounce back loan scheme],” Mr Sunak told lenders on Saturday.

What will happen if a business cannot afford to repay the bounce back loan?

Banks will chase borrowers who default, seeking to seize property or other assets.

If they cannot recover the money, they will approach the British Business Bank and activate the government guarantee.

The British Chambers of Commerce said 30 per cent of its members could not afford to pay loans back.

Suren Thiru, head of economics at the British Chambers of Commerce, said: “Serious consideration must . . . be given to the expansion of grant schemes for firms unwilling to take on more debt repayments.”

The FT’s Claer Barrett and Andy Bounds will take part in a live video Q&A with readers about bounce back loans on May 5 at 12 noon. To view or ask questions, go to FT.com/businessclinic