Recovery Loan Scheme: the latest government aid package for small businesses

Only Fools and Horses — The RLS addresses the needs of sole traders too

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Will the Recovery Loan Scheme rescue struggling small businesses?

Last week saw the launch of the Recovery Loan Scheme (RLS), the latest government programme for firms hurt by Covid-19. It replaces all the plans unveiled a year ago. Ministers say the RLS will be available until at least the end of 2021, though it is less generous than its predecessors.

Businesses can borrow up to £10m through the RLS, with the loan repayable over a term of up to six years. The state guarantees up to 80% of the loan, enabling banks and other providers to lend more widely and generously. Firms can set the borrowing up as a conventional bank loan or overdraft, or opt for an asset-finance or invoice-finance arrangement.

The scheme is open to all businesses irrespective of turnover, and companies that borrowed through the previous schemes can apply for further finance from the RLS. To be eligible, businesses must certify that they have been negatively affected by Covid-19: that they have been unable to trade, for example, or that sales have fallen. But they can use RLS finance however they see fit, from managing cashflow to funding new investments.

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Unlike with the previous schemes, the government is not picking up the cost of the first year of interest charges or any fees that may be payable to set up the finance. The loans come from banks accredited by the British Business Bank to take part in the scheme, including the main high street banks, with the state leaving providers to set their own terms. But it has warned lenders it expects costs to reflect the economic benefit of the guarantee it is providing – and lenders will not be allowed to ask for personal guarantees from company directors on loans of less than £250,000.

The upshot is that the RLS is likely to be more expensive for many businesses than the schemes it replaces; the six-year term of loans, compared with ten years for previous programmes, also means repayments will be higher. Some businesses may even be able to secure a better deal through more conventional arrangements not backed by the government, so it is worth discussing these with lenders.

Consider other options

This scheme is drawn with wider terms than the three separate ones it replaces, seeking to meet the needs of businesses of different sizes, including both sole traders and limited companies. For the smallest firms in particular, other options may be better. The British Business Bank’s Start Up Loans scheme offers advances of up to £25,000 for firms in their first two years of trading at a fixed rate of 6% a year.

Still, the fact that RLS money can be used for any legitimate business purpose is particularly valuable. For some, it may make sense to use the finance to repay previous borrowing taken out on more expensive terms.The British Business Bank has full details of the scheme, and participating lenders, onbritish-business-bank.co.uk. You needn’t be an existing customer of a lender to apply to it for an RLS loan.

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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.