Recovery Loan Scheme: what contractors need to know

In the likely instance of scant help for limited company suppliers in today’s Spring Statement 2022, such contractors might like the sound of the Recovery Loan Scheme, which has been designed to financially help businesses transition to the new post-covid normality, writes Gareth Wilcox, partner at Opus Business Advisory Group.

What is the Recovery Loan Scheme?

As touched upon in a previous article, the Recovery Loan Scheme (RLS) was designed to support businesses with cashflow, just as the economy recovers from the impact of the Covid-19 pandemic. 

The RLS was launched on April 6th 2021 and replaced the much-utilised Bounce Back Loan scheme and Coronavirus Business Interruption Loan Scheme.

Initially, RLS was open to all businesses, including those which had previously received support under the prior BBL/CBIL schemes, as long as they met the other eligibility criteria, namely:

1. The business is trading in the UK;
2. The business would be viable were it not for the pandemic;
3. The business has been adversely impacted by the pandemic;
4. The business is not in collective insolvency proceedings.

The only businesses which were precluded from applying were banks, building societies, insurers, and reinsurers (but not brokers), as well as public-sector bodies, state-funded primary and secondary schools.

As with the previous covid-related loan schemes, no personal guarantees were to be taken on facilities up to £250,000, and a borrower’s principal private residence could not be taken as security. Further in common with previous schemes, RLS came with a government guarantee to cover the lender in the event of default, in the RLS’s case capped at 80%. 

The scheme was clearly not designed for micro businesses, since the minimum loan value was £25,001 (maximum £10million), although invoice or asset finance was available from £1,000 (again with a max of £10m). This level would, therefore, bring RLS within the scope of some contractor businesses.

When does the scheme run until?

Originally, the RLS scheme was due to run until the end of 2021, but one of the lesser-publicised announcements from Autumn Budget 2021 was an extension of the RLS until June 2022. But the extension came with additional restrictions which took effect from January 1st 2022, namely:

1. The scheme is now only open to small and medium sized enterprises;
2. The maximum amount of finance available has been reduced to £2 million per business.

In conjunction with the above, the government guarantee provided to lenders was reduced to 70%.

Has the Recovery Loan Scheme been a success?

It emerged around the time of  Autumn Budget 2021 that take-up of the RLS had been lower than anticipated, particularly when compared with the £80billion of government-backed loans issued up to May 2021. 

The relatively low uptake has been attributed in part to a greater level of scrutiny being applied to applications by RLS providers than under the Bounce Back scheme, which did not provide for affordability or other such checks. 

This scrutiny and reticence to lend is an understandable position given that, unlike the Bounce Back loan which offered a 100% guarantee, under the RLS a lender is exposed for 20 or 30% of the funds being advanced.

It is also worth bearing in mind that the RLS is running during a time when directors’ liability for wrongful trading has been reinstated, so there is also possibly a reticence among directors to take on further borrowing at a time when trading conditions remain uncertain, and they could be held liable for additional losses.

Recovery Loan Scheme’s low uptake isn’t recovering

Several lender contacts of mine have confirmed that take-up of the RLS has indeed not been widespread, particularly compared to the number of Bounce Back loans issued.

As mentioned, this is considered largely due to the additional scrutiny being applied by lenders, and a reticence to lend on riskier cases, which is understandable given that lenders are now putting their funds at risk. 

I am also advised that lenders have been receiving applications under the RLS on less risky propositions, where the proposed borrower would have been able to obtain lending on ordinary commercial terms outside the RLS in any event.  While such applications would be arguably outside of the ‘spirit’ of the scheme, if a lender advances on ordinary terms rather than under RLS, they are able to take guarantees and security which RLS would not allow, i.e. to cover 100% of borrowing. 

While some commentators may think that it is unfair for lenders to be unwilling to share in the risk of investing in businesses, it is worth bearing in mind that many of the accredited RLS lenders are concurrently seeking to recover the large number of advances made under previous schemes. Unfortunately, this is leading to a large number of defaults and, even though the lender is ultimately covered, there is an administrative burden in submitting claims under the government scheme, with a requirement for them to demonstrate that they have in the first instance sought the funds from the borrower. 

Ultimately, all lenders have shareholders or individual investors to answer to, who expect funds to be lent responsibly and risk limited wherever possible.

Final thought

At the time of writing – on the very eve of the chancellor’s Spring Statement 2022, it is still the case that the Recovery Loan Scheme can prove to a useful tool for some owner-managed businesses, which are on the road to recovery as Covid (hopefully) continues to recede. However that reticence for would-be lenders to lend, and would-be borrowers to borrow, means that its impact seems destined to be limited, not just among contractors but by companies as a whole. Potentially, the chancellor might recognise that tomorrow, knowing that he’s keen to move from recovery mode to recovering mode.