The new tax year, beginning 6th April, will see the launch of the UK government’s new debt finance programme. The Recovery Loan Scheme (RLS) will replace the existing three lending programmes set up in the immediate aftermath of the onset of Covid-19 in the UK a year ago. The RLS will replace the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Bounce Back Loan Scheme (BBLS).
While lenders including Starling Bank and Funding Cirlce have indicated to AltFi that they’re interested in participating, and other lenders including Atom Bank, Barclays, Lloyds and Virgin Money have all said publicly that they plan to take part, the British Business Bank has yet to confirm which lenders will be involved.
A spokesperson told AltFi that: “The British Business Bank is inviting all existing CBILS lenders to participate in an accelerated accreditation process for those CBILS lenders that satisfy relevant criteria.”
Meanwhile, a “full accreditation process” is available for lenders who haven’t taken part in these government-backed schemes before.
But what kind of loans will be available for businesses? And is this an improved scheme for lenders taking part?
Well, as has been the case with CBILS, CLBILS and BBLS, this new scheme is very much built on the lessons of those schemes that came before it—for better or worse.
The Recovery Loan Scheme will undoubtedly be the most flexible and straightforward scheme that has been introduced to-date, certainly for businesses.
Previous schemes have had strict criteria around the size of the business applying (CBILS less than £45m turnover, CLBILS over £45m turnover) along with different amounts of borrowing available at each stage.
The RLS, on the other hand, simplifies this all into one offering for businesses of all sizes and stages.
Borrowing amounts range from invoice financing as little as £1,000 all the way up to term loans of £10m.
Terms are at the longer end of what has been offered so far, at up to six years, just shy of the ‘pay as you grow’ 10 year term option recently added to Bounce Back Loans.
Finally there are no personal guarantees on loans of up to £250k, and interest rates are capped at 15 per cent—again all lessons learnt from the launches of CBILS and BBLS in 2020.
For borrowers and lenders, the bad news is that the government is only guaranteeing 80 per cent of the loan amounts, regardless of the size.
This is in line with what was offered for CBILS, but not as high as the 100 per cent guarantee on BBLS.
What this likely means is that lenders will be more cautious on approving borrowers, even for smaller loan amounts.
This is in comparison to BBLS, which flew out the door after it launched on 4 May 2020, quickly overtaking CBILS lending, and eventually helping to support over £45.5bn in SME lending.
The Recovery Loan Scheme walks a delicate tightrope between supporting tens of thousands of UK businesses attempting to survive in the midst of a huge economic crisis, whilst at the same time tightening lending criteria in order to prevent taxpayer cash from propping up failed businesses (and fraudsters).
Latest Loan Offer
The latest loan offer on site has an A-rating and an annual rate of interest of 7 per cent. The term of the loan is 12 months. The offer, just launched, is now 28 per cent filled.
Historical Performance And IFISA Process Guide
That figure is the result of over £20 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2020/21 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.