Small businesses ‘spend twice as much as much’ by using wrong Government loan scheme

Linda J. Dodson

Small businesses which rushed to take out a taxpayer-backed coronavirus support loan could be paying double the amount needed to secure the support.

Firms that acted swiftly to secure cash through the Treasury’s initial Coronavirus Business Interruption Loan Scheme (Cbils) are typically paying far higher charges than those which waited for several weeks until the newer Bounce Back programme was launched to help the smallest businesses, experts have said.

Analysis by accountant HW Fisher found that in some cases small businesses had taken out a business interruption loan with an interest rate of 6pc. They could make a significant saving by switching to the bounce back loan, where rates are fixed at 2.5pc.

Since launch, lenders have approved more than £31.3bn of loans to 745,000 businesses. Two-thirds of this total – equivalent to £21.3bn – has been offered under the bounce back scheme, which doles out up to £50,000 to companies.

However, the remaining £8.9bn has been granted as business interruption loans, with potentially higher rates. Cbils was launched first and came with a guarantee that 80pc of lending banks’ losses would be covered by the taxpayer if a borrower defaulted.

But take-up was slow and banks were accused of dragging their feet, so the bounce back programme was set up as an alternative with a guarantee of 100pc.

A £50,000 Cbils loan at 6pc interest would result in annual charges of £3,000, while a bounce back loan at 2.5pc would cut this to £1,250. It is possible to switch between loans, but few businesses have taken advantage of this.

HW Fisher said small business owners could be wasting their cash on high interest rates at a time when their money could be much better spent. 

Simon Michaels, of HW Fisher, said: “Many businesses which needed a smaller loan or indeed any size loan opted for an interruption loan because it was the only option at the time. Now that the bounce back loan has been introduced, those that had a loan of £50,000 or less would be better off switching.” 

Mr Michaels said that business owners are able to switch their loans by speaking to their bank. However, he said that many banks have not been offering clear guidance to customers. 

He said: “The interest rate differential means a potential 50-60pc variation in repayments – a little known fact which banks do not seem eager to talk about.” 

The interest rates for bounce back loans are fixed at 2.5pc while commercial providers are able to set the rates for business interruption loans. These vary from 1.4pc to 8.9pc depending on the customer profile and the bank providing the loan. An average rate of 6pc is being charged, HW Fisher said.

Mr Michaels said many businesses might not have appreciated the difference between the two loan schemes as the interest for the first 12 months is paid for by the Government. It is only after this initial term that customers are charged. 

A spokesman for UK Finance, the banking trade body, said: “Any customer with a business interruption scheme loan or overdraft of £50,000 or less will be able to switch that facility to a bounce back scheme loan should they wish to do so over the next few months by arrangement with lenders. 

“Pricing is only one aspect of the product and customers would need to consider other differences with their existing facilities.”

The transfer is possible until Nov 4, 2020. 

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