By Phil Archer, QFP, Asset Finance Manager d&t
The Bounce Back Loan scheme that was introduced as a response to the Pandemic is a straight-forward way to secure emergency funding. It was designed as easily accessible capital to keep businesses afloat by providing loans from £2k up to £50K, subject to a maximum of 25% of turnover. It’s 100% Government backed and effectively free for a year. After that time, it will be necessary to repay the loan over the following five years at an interest rate of 2.5% flat, which is approximately 4.8% APR. The arrangement lasts for a total of six years including the payment holiday period.
Precisely what a Bounce Back loan can be used for is not fully defined and we have become aware of suggestions where perhaps the use of the funding goes outside of the intention of the scheme and may therefore be subject to some questions. It seems to be a slightly grey area but perhaps the best way to look at this is to consider what’s reasonable and within the scope of your normal business practice. Therefore, we’ve outlined some suggested do’s and don’ts to help franchised businesses.
- Do use a Bounce Back loan to pay salaries and directors’ drawings at the normal level that were paid preceding COVID-19. For example: A restaurant borrowing £40K and using the funds to pay the salaries of staff still working is perfectly acceptable. Furloughed staff are covered through that scheme. However, using the capital to give the directors or staff a pay rise and remunerate them at an increased rate is perhaps not!
- Do use a Bounce Back loan to kick start your franchise. This may be for investing in marketing, advertising, revamping your web site, digital marketing and growing your business post lockdown through promotion.
- Do use a Bounce Back loan to restructure existing finance. You can pay off any existing funding arrangement including bank loans, Lease or Hire Purchase agreements for vehicles or equipment. However, do be careful here: firstly, once these funds are used-up you may struggle to raise more finance in the future, given the current climate. Therefore, it is advisable to ensure sufficient cash reserves remain in the business.
Secondly, make sure you are fully aware of any early repayment or settlement issues. For example: with a lease on a vehicle, settling early may result in costly title transfer fees to ensure you can actually own the vehicle once the lease is paid off. So do read the small print!
It’s also important to be aware of the type of loan you have. With some types of finance agreements like Lease and Hire Purchase, you may not save any interest payable as capital plus interest on the whole term of the loan is payable, even if settled early. Be sure to take into account this pre-calculated interest if it’s included in a settlement figure, or by refinancing you may end up paying interest on interest.
On the other hand, where you are paying interest on a “daily” charged loan or overdraft, which is usually the case with bank facilities, paying off early could be beneficial. In these cases, you could clear loans and save on current monthly outgoings for 12 months.
However, what’s unlikely to be within the spirit of the scheme is using your Bounce Back loan to pay off the finance for a mid-sized, ordinary company car and going out to buy a top-of-the-range sports car, as this might be deemed as outside normal business activity!
Here is a comparison for a typical franchisee who has taken out initial bank loan, to purchase the franchise, of say £50,000 over 5 years at 6% APR. Payments are £967 per month. After two years of the five-year term (24 payments) the franchisee currently owes £31,774 which is the amount to refinance. The total payments left to pay are 36 x £967 = £34,812.
Compare this with borrowing the same £31,774 on a Bounce Back Loan, giving the franchisee 12 months of nil payments and then 60 months of £595 per month. Total to pay = £35,700
As you can see, the overall costs are marginally more in this example. However, for one year there are no payments (£967 per month better off) with the Bounce Back loan option and after that time, the franchisee would still pay slightly less per month than with the bank loan. The franchisee could even pay back the Bounce Back loan early and save interest and cost as the business recovers. Of course, if your Bank offers you a ‘capital repayment holiday’ on a bank loan, this may be a better option depending on what rate you are currently paying. It can be complicated and so do take professional financial advice to ensure you take the best option for your franchise. NOTE: This is a simple financial example. Business and personal circumstances and all needs and objectives must be considered before undertaking any refinance approach. Consult your accountant.
- Do use a Bounce Back loan to fund expansion if it’s within the normal remit of the franchise. This may be to purchase an additional van or new equipment for example. However, buying a further territory (if this is outside the scope of normal business) may or may not be, depending on the justification. You will need to demonstrate the expansion is sound business practice.
Don’t use these borrowed funds to make a personal contribution to buying a brand-new franchised business. An inter-company loan or sudden sizable repayment of a Directors Loan from an existing business is likely to be considered outside of the normal business activities of the original franchise. It’s also the case that “borrowed” funds are not usually considered acceptable by other lenders as personal contributions, should you need additional funding for the new business.
- Do use the Bounce Back loan to pay off a Coronavirus Business Interruption Loan Scheme (CIBILS) facility of up to £50K. You can’t have both types of loans (CIBILS and Bounce Back) at the same time, but in some circumstances it is advantageous to pay off a CIBILS loan (or any other type of loan) through the Bounce Back scheme because the rates and terms are preferable. However, you must be able to repay the CBILS loan in full. Partial repayment by this method is not acceptable.
If you still need to consider other options for funding and your business is still less than two years of trading, it may be possible to apply for a Start Up loan.
The key is having a clear handle on your numbers.
There is no-doubt finance can be a complex topic and one mistake or wrong turn can have far-reaching effects. At d&t, our friendly, experienced team are always happy to advise and help navigate the best way forward for individual franchise owners and franchisors. Our team add value not just numbers and are trusted to provide the most appropriate advice dependent on individual circumstances. d&t is an accredited introducer for start-up loans and CBILS.
For further information please contact Phil Archer on 07379 239686