Contractors, is a Bounce Back Loan the way to put a spring in your PSC’s step?

Yesterday was the day that limited company contractors have been waiting for, potentially, because before new Bounce Back Loans offering up to £50,000 opened, there wasn’t much coronavirus income support for the UK’s small but incorporated businesses-owners, writes Chris Biggs, managing director of consultancy and chartered accountancy firm Theta Financial Reporting.

The excluded

Those feeling left out of financial assistance during the COVID-19 outbreak often just employ one person who is also the sole director and, to manage the cashflows of the business, that one person takes a minimum salary and then pays themselves in dividends. Assuming there is cash available to do so, of course!

It’s true that such a sole-person enterprise can be furloughed, but support from the government is based only on their minimum salary – which for tax-efficiency they have to keep low, and the furlough scheme excludes dividends. So often, it wasn’t realistic to furlough the only person in the business. 

Many feared (and still fear) that such Personal Service Company contractors fall into the small but critical percentage of businesses that the government says they are going to be unable to help get through this pandemic. And to a degree this is still the case. 

Some relief

However, the newly launched Bounce Back Loan (BBL) scheme does offer some relief, because contractors running their own limited company can, from yesterday, apply for a government-backed loan with preferential rate. (N.B. The scheme is separate to the Coronavirus Job Retention Scheme so PSC contractors are still stuck with only 80% of their salary for three months if furloughed; but BBL can be switched over to from the Coronavirus Business Interruption Loan Scheme, meaning CBILS loans can now be taken as more generous BBL loans).

In more than a few cases, the BBL scheme will offer some relief and support to such contractors who are suffering a complete cliff edge fall of income dropping off and no cashflow. Be aware though, this is not a ‘contribution' or 'grant’ to your business, but a loan which will need to be paid back.

On offer from the Department of Business, Energy & Energy Strategy, the response to BBLs from small and medium-sized businesses affected by COVID-19 is, in its first 24 hours, overwhelmingly positive. A reported 45,000 applications to the major banks in a single day.

Between £2,000 and £50,000...

And you can see why. Not only have many PSC contractors been starved of coronavirus support measures, but also the loan terms are appealing. Limited company directors can apply for any sum from upwards of £2,000 to up to 25% of a business’ turnover in the 2019 calendar year (special rules apply for businesses established after January 1st 2019). The scheme maxes out a loan of £50,000. 

Furthermore, the loans are 100% guaranteed by the government, differentiating them from the Coronavirus Business Interruption Loan Scheme, which are guaranteed by the government for 80%. Additionally, there will not be any fees or interest to pay for the first 12 months and the loan term can be for up to six years. It is expected that the loan can be repaid early without penalty. And the government has worked with lenders to agree a low rate of interest (2.5%) for the remaining period of the loans, and all loan providers have to be part of a network of accredited lenders.

Who qualifies; who doesn't

So are you eligible? Businesses can apply if they are based in the UK; were trading on March 1st 2020; have been negatively affected by coronavirus, and was not an ‘undertaking in difficulty’ on December 31st 2019.

However, those who cannot apply for the Bounce Back Loan are banks, insurers or reinsurers (although insurance brokers can apply), public sector bodies and state-funded primary and secondary schools.

As mentioned earlier, contractor business owners who have already applied for (or received) a loan under the CBILS (Coronavirus Business Interruption Loan Scheme) can ‘convert’ their CBIL into a Bounce Back Loan. taking advantage of latter’s terms. Note, lenders are not permitted to take personal guarantees or take recovery action over a borrower’s personal assets (such as their main home or personal vehicle).

All in all, and with the government pledging to both provide further guidance and get the loans out to firms who need them “within days,” it is very pleasing to see that the government is guaranteeing the loans for the full amount. This total backing should make lenders more willing to administer loans, which in some cases are desperately and urgently needed.

Pending the usual considerations as to whether your business ought to take on a debt, and importantly, its ability to pay off that debt, we believe BBLs are going to be widely welcomed by the business community, especially as an upgrade to CBILS.

Answers we'd like about this lifeline

There is some doubt about the payment terms of the new scheme, however. Questions are already arising, such as:

  • Can the government keep the scheme up and running on the same Ts&Cs?
  • Can the banks’ websites/ online portals cope with the amount of applications?
  • Will payments be made shortly after the scheme is up and running or will there be delays in applications, then payments, being processed?  

We ask the latter knowing that there are many small businesses yet to receive the cash grants they applied for weeks ago (thanks to the CBILS), which puts in doubt whether this cash will be available as quickly as “within days.” All we can hope is that the government clarifies this commitment to give security to businesses that are in dire need of this potentially life-saving, business-saving, funding.

'Undertaking in difficulty'

Another point we would like clarity on relates to what is meant by businesses not being an ‘undertaking in difficulty,’ The government needs to provide very clear guidance of what is meant by this.

  • Could this wording be used by lenders to refuse loans, and if so how?
  • What type and how much evidence will businesses have to provide?
  • Will businesses have this information readily available?
  • Will it be the borrower’s decision or the lender’s on how much the loan will be made for?

These are all fundamental questions that the government needs to answer in order to cement the viability of these loans as an option for businesses in the contractor space.

More information will surely become available as the loan scheme finds its feet. But for maximum effectiveness of the scheme to do good for the right people in the right businesses, more of this type of detail needs to be clarified to ensure that companies are applying for the best government-backed product for them.

Difficult, different, deducted

Despite these doubts, Bounce Back Loans will be a welcome measure for those small company-owners who remain confident enough of resuming normal trading post-pandemic, and who will therefore being able to start making loan repayments after the first 12 months.

However, for others with more uncertain futures, deciding whether to take on additional debt -- in times when the viability of their company's foreseeable future is questionable -- will be a difficult decision. This means that businesses must be realistic about their prospects and understand the new marketplace they are in. Unfortunately, the future is an unknown and COVID-19 has made 2020 a vastly different environment from what we all envisaged.

Still, businesses need to understand what may be in store for them. If you are unsure if a BBL is suitable for you, take the time to speak to your accountant or adviser, drawing on as much evidence as possible. Call them up with a willingness to use this lockdown period to assess your business’ new direction, post-pandemic.

Finally, the particulars of the loans may warrant expert assistance from an accounting standpoint. For example, interest expense on allowable loans is usually deducted from taxable profits for corporation tax purposes, but the exact timing and basis for when the interest is deducted from taxable profits will depend on the final terms of the BBL. Seeking professional advice from an accountant or tax adviser is therefore going to be as standard as these new loans’ terms, for the shrewd.

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Written by Chris Biggs

Chris Biggs leads Theta Financial Reporting’s IFRS, US and UK GAAP accounting advisory services and has a wide range of experience across both FS and non FS clients. He has specialised in providing clients with support in addressing complex financial reporting challenges including financial instruments, impairments and asset finance & leasing. His twenty years of experience includes the last ten years as a Director in a Big 4 firm, leading their accounting advisory support to banking and asset finance clients.

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