The introduction of the Bounce Back Loan Scheme was announced by the Chancellor Rishi Sunak on 27 April. It was designed to get fast funding to the small businesses that could not access other government schemes and had been financially impacted by the Covid-19 pandemic.
More than 1.3 million small businesses have accessed loans worth more than £30bn to date, and with the scheme open for applications until 31 January 2021, we expect to see that figure rise significantly. The terms of the scheme dictate that the loan must be used ‘for the economic benefit of the business’. If it’s not and the business fails, you could be liable to repay the loan personally. But what exactly are small businesses using the Bounce Back Loan for?
In this guide, we’re going to explore five potential ways a Bounce Back Loan could be used to benefit your business.
A huge number of companies across a broad range of industries have seen their turnover fall dramatically, in some cases to nothing, as a result of the first and second lockdowns. While the government’s furlough scheme, which was recently extended, has helped employers to meet wage costs, there are still other parties, such as HMRC, landlords, commercial lenders and suppliers, who need to be paid.
Many businesses are choosing to use the Bounce Back Loan to top up cash reserves that are dwindling. That can provide the cash flow boost businesses need to make essential payments and survive until things return to something approaching normal.
If you’re unable to predict the future level of demand and are unsure when your business’s turnover will return to previous levels, you may have little choice but to make redundancies. This is a terrible position to find yourself in, but to save the business and prevent more jobs being lost, it may be the only route available to you.
If the costs you incur by making employees redundant could jeopardise the future of your business, you can apply for financial support from the Redundancy Payment Service (RPS). However, as yet, it’s not clear whether a business with a Bounce Back Loan (BBL) can also apply for support from the RPS. For that reason, you may have to use funds from the Bounce Back Loan to meet the costs of redundancy.
As the Bounce Back Loan is such a cheap form of finance, it can be an effective way of refinancing existing debts. With no repayments having to be made on the loan for the first year, you could use it to repay more expensive credit card debts or commercial loans you have. When the repayments begin on the Bounce Back Loan, interest is fixed at just 2.5%, which is still likely to be significantly less than you’re paying on other forms of borrowing.
However, you must be very careful if this is an approach you plan to take. If the business becomes insolvent despite the presence of the Bounce Back Loan and enters into liquidation, the liquidator will look at how the funds from the loan were used. If they find that some creditors were repaid in preference of others, you could be made personally liable to repay some of the company’s debts. For example, if you repay a loan that you have personally guaranteed while ignoring liabilities to HMRC or suppliers, you could find yourself in trouble.
If you hope to maintain good relationships with your suppliers and have the cash available to do so, then settling any outstanding invoices will help to protect your suppliers’ cash balances and your supply chain. Many suppliers whose sales have dropped may also be left with excess levels of stock. That could make it a good time to negotiate a discount and get a deal that will improve your business’s profit margins while helping the supplier out of a cash flow hole.
Necessity is the mother of invention, or in this case, innovation. If your normal channels to market have been hit hard by the pandemic, this could be a time to make changes that can benefit your business long after the outbreak is over. For example, using the Bounce Back Loan to create a website so you can sell online could be a decision that changes the fortunes of your business for years to come.
Similarly, you may now have the time to completely rethink your marketing strategy or even refurbish your business. Companies that survive a downturn often come out of it much stronger than they went in. This is your chance to make lasting changes that will benefit your business now and long into the future.