Guest blog: The next challenge for businesses?

19 May 2021

As the Recovery Loan Scheme Replaces BBLs, Keith Tully, Partner at Real Business Rescue, looks at the danger of debt loading…

The Bounce Back Loan Scheme (BBLS) closed for new applications on 31^st March 2021 and has been replaced by the Recovery Loan Scheme. Businesses can now apply for finance to help them recover and grow as we emerge from another national lockdown, and begin to look forward with more confidence.

There is a danger that businesses could take on too much debt, however, if they have already secured finance under BBLS or other coronavirus loan schemes. So before we look at how significant the danger of debt loading is in our current economy, how does the Recovery Loan Scheme work?

What is the Recovery Loan Scheme?

The Recovery Loan Scheme opened on 6^th April 2021 and is available to eligible businesses affected by the coronavirus pandemic. Lenders are provided with an 80% government-backed guarantee should a business default, but borrowers remain fully liable for all unpaid amounts.

Up to £10 million of funding is available from accredited lenders in the form of term loans, invoice finance, asset finance, and overdrafts. Additionally, personal guarantees can only be taken for finance applications over £250,000, and this is at the lender’s discretion.

Although finance obtained under other Covid-19 emergency loan schemes can limit the amounts available under the Recovery Loan Scheme, businesses still run the risk of taking on too much debt when our economic future is far from certain.

What is debt loading?

A debt load is the total amount of debt taken on by a business. Whether a company’s debt load is dangerous typically depends on factors such as the company’s size, and is generally established by comparing the amount of debt with the business’ assets or equity.

The industry in which it operates is also a factor, as some industries naturally require businesses to trade with higher debt loads. Debt loading does carry risk, particularly when markets are depressed, and when economic forecasts are less reliable due to extraordinary circumstances.

So how might this risk materialise as the Recovery Loan Scheme replaces Bounce Back Loans?

The danger of debt loading

Businesses with high debt loads risk being unable to service the debt if trade declines or unexpected events damage their operational capability. The global pandemic of 2020 has shown us just how quickly businesses can be adversely affected by unprecedented circumstances. 

If the dangers of debt loading do materialise for businesses in the coming months and years, it could lead to considerable insolvencies and liquidations of previously profitable and growing businesses.

This alone will further damage an economy still reeling from the coronavirus pandemic, creating further instability and future uncertainties.

Could a Recovery Loan be a debt too far for some businesses?

Under the Recovery Loan Scheme borrowers pay interest and fees from the outset, with a cap of 14.99% being imposed by the government. Finance can be used for any legitimate business purpose – supporting cash flow or investing in new machinery, for example.

The pandemic has proven to be unpredictable, however, and if the country was overwhelmed by another wave of coronavirus, businesses could find themselves in financial crisis.

Unable to repay their Recovery Loan in addition to other emergency loans, they may be left with little choice other than to liquidate. 

Clear danger of debt loading

Debt loading may not seem dangerous when the government is offering such wide support for businesses, but their guarantee is to the lender, not the borrower. Lenders will, therefore, continue to use standard forms of debt recovery in cases of default.

Personal guarantees for business borrowing are another area of concern. Although personal guarantees have been capped at a maximum of 20% once funds from a business asset sale are applied, lenders will still invoke the guarantees provided by directors and have the right to pursue directors through the courts if they cannot pay.

In a recovering economy, a tangible risk exists for businesses that have taken on too much debt. As the Recovery Loan Scheme replaces BBLs, let us hope the highly successful vaccination programme provides the same protection for the economy as it does for individuals, by negating the need for future restrictions on trade.

For more information about company debt problems, please visit https://www.realbusinessrescue.co.uk/company-problems

About the author

Keith Tully is a Partner at Real Business Rescue, part of Begbies Traynor Group plc. and has 30 years’ experience advising directors across a range of company distress issues. Keith recently set up a dedicated Covid-19 Support group for business owners across the North West, where he is based.