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April 28th 2020, by Calvin Cooper

On 27 April 2020 Rishi Sunak announced the governments next COVID-19 economic boost; this time in the form of government-backed loans of up to £50k for small and medium-sized businesses. Aptly named the 'Bounce Back Loan' scheme (BBL).

Unlike their previously announced bigger brother, the CBILS loans, these new loans are 100% government backed. (CBILS are only 80% backed).

Similar to CBILS, there's no interest or fees to pay for the first 12 months of the loan. The BBL's will also last for 6 years, but importantly no repayments will be required for the first 12 months!

Applications will be made through the accredited lenders (which will probably be those listed here) once the scheme goes live on 4 May 2020.

If you've already got a loan under the CBILS, you wont be eligible for this new scheme.

This sounds pretty awesome. What's the catch?

Well, one important point to remember is that the government backing is for the bank itself, not for you as the borrower.

Therefore, if your business defaults on the loan, the government will plug the gap by paying the difference across to the bank directly. This is to give the banks comfort in offering these loans, where they might otherwise doubt the financial stability of the applicant.

You still remain 100% liable for keeping up with the repayments of the loan so long as your business is carrying on; similar to any other debt your business takes on.

And therein lies the key point . . .

Is this good debt or bad debt?

There isn't a one size fits all answer to this. It very much depends on the circumstances of your business.

First, let's define them:

  • Bad debt = borrowing happiness from the bank. Using borrowed money to buy something which you cannot otherwise afford, which does not make commercial sense, and will not sufficiently improve the position of your business.
  • Good debt = debt which allows your business to do/invest in something it wouldn't otherwise have been able to do, but, importantly, which more than pays for itself in the process.

Here's a few things we consider:

Are you using the money to buy an income generating asset?

Short answer = probably good debt.

If you take out the full whack of £50k, and repay that over the full 6 year period, that gives you repayments of £833 per month (as you pay nothing for the first 12 months).

If you use the cash to invest in new assets which generate income of £1,200 per month, you will have earned £86,400 over that time.

Interest aside, you're £36,400 better off over the life of the loan than if you hadn't taken it. Good debt.

These income generating assets might be:

  • New employees - some businesses will need all hands on the deck once COVID-19 is by with!
  • New plant and machinery

Key consideration: will the income generating asset make more profit than the cost of the loan repayments?

Are you using the money to replace an asset which is costing too much?

Short answer = used wisely, it can be good debt.

For us, the theory is similar here. So we're not going to write that out again.

However, for investing in cost savings, we see two common areas:

  1. New machinery/vehicles: buying a snazzy new vehicle is not usually a good commerical decision. We've talked about this before. However, if your old banger of a van is costing a bomb each year in repairs, and buying a new van would be more reliable and cost less in repairs/general running costs, there's possibly a commercial justification for using this money to invest in new assets like this. The savings need to be significant though, and this isn't often the case.
  2. Software: if there is part of your internal process which takes a tonne of staff time, and is very innefficient. Would investing in new software and/or new computers mean that your business runs smoother, and saves admin costs (and eliminates the stress of inefficiencies)? If so, again depending on the level of efficiencies and time savings, there is potentially a good argument to use this to build a slicker business, which is ready to generate more income, more easily, and therefore fully justify the cost of the loan.

Cost savings are an area where you need to be honest with yourself. Don't get into false good debt mindset, and justify an indulgence on the basis that it saves some costs.

Ask yourself; does it save enough costs? Will the efficiencies allow me to earn more money, more quickly, in the process?

Be honest.

Key takeaway: Quantify the cost savings; costs being time, money spent, and current lost potential income (due to inefficiencies). Will the costs recovered more than outweigh the loan repayments?

Is this being used to boost working capital?

Short answer = 50:50.

If you're using this loan to clear off existing debt which carries a higher interest rate than the new loan; that is a no-brainer. This will save your business money in the long run. Typically, this would be to clear credit card debts and existing loans from alternative lenders.

However, if you're just using this loan to boost the average bank balance, as you think cash might get tight over this next wee while, and hope that this will be enough to get you through; we would advise caution.

We don't build successful businesses on thoughts and hopes alone.

Yes, they're an essential element of your business journey - as creativity is behind all successful businesses - but these need to be backed up by a plan of action.

Key takeaway: don't take it just because it's available to you. That is a highway straight to a business full of bad debt. Come up with a plan, and turn this opportunity into the good debt your business is craving.

Do the numbers, check it with an advisor if needed, and the execute based on the reality of your situation.

Final words

With the problems we've seen businesses face in trying to access the 80%-backed CBILS loans, these new 100%-backed BBL's are very welcome.

However, as with the introduction of any debt to a business, it must make commercial sense for you and your business.

Do the numbers, check it with an advisor if needed, and then execute based on the reality of your situation.

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CRC Accountancy
4 Soulisquoy Loan, Kirkwall, Orkney, KW15 1BY

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CRC Accountancy
4 Soulisquoy Loan, Kirkwall, Orkney, KW15 1BY

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