Will the Recovery Loan Scheme rescue struggling small businesses?

The Recovery Loan Scheme (RLS) was launched to support businesses seeking to bounce back from the Covid-19 pandemic, but it struggled to gain traction before finally coming to an end on 30 June. Now, however, the government is relaunching the scheme amid growing concern about the difficulties many smaller businesses face raising capital.

The RLS went live on 1 April 2021 as the emergency-loan schemes for businesses set up during the pandemic came to an end. It offered loans of up to £10m per firm, with banks encouraged to lend through a government guarantee promising that the taxpayer would cover a sizeable chunk of any debt remaining should a borrower default.

A second flop

At the beginning of the year the RLS was revamped, with new rules to tailor it specifically to small and medium-sized enterprises. The maximum loan available was cut to £2m, and the government also reduced the proportion of each debt it guarantees from 80% to 70%.

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Neither version of the RLS proved to be a resounding success – fewer than 19,000 businesses applied for credit over the 15 months following its launch, with the average borrower taking out £202,000 of credit.

Nevertheless, ministers have decided to press ahead with a two-year expansion to the scheme, offered on the same terms as the revamped RLS. This reflects anxiety about the difficulties facing small businesses, as well as their struggle to secure traditional credit in the current crisis.

More than half a million businesses could go bust as a result of rising inflation, the Federation of Small Businesses (FSB) warned in the spring. The FSB also published separate research showing lending to its members had fallen to an all-time low. In theory, the RLS could prove to be a lifeline for businesses in trouble. Banks should be more open to lending to businesses that would otherwise be rejected as too risky, as they have recourse to a government guarantee for 70% of each advance, though the original 80% pledge provided more peace of mind.

Small business groups and advisers question whether take-up of the RLS will be any higher throughout the two-year extension. Lenders may be unwilling to support businesses that in many cases already have substantial Covid-19 loans to repay.

On top of that, the scheme is expensive. Interest rates are capped at 14.99%, which is costly compared with the emergency-loan programmes launched throughout the pandemic.

Nevertheless, there will be businesses to which the RLS appeals. The scheme may prove cheaper than other types of business borrowing, and the 70% guarantee will allow lenders to look favourably at more applications.

Moreover, the RLS is flexible. Funding can be set up as traditional overdrafts or term loans, or businesses can open an invoice or asset-finance facility. The loans are repayable over three or six years, depending on the type of borrowing.

One important caveat is that business owners will need to check with lenders whether they are expected to provide a personal guarantee. It’s important to recognise that while the government operates as a backstop for lenders, the legal liability for the loan remains with the borrower. Banks are entitled to ask for personal guarantees from business owners and directors on advances of over £250,000.