The past six months have brought huge changes in the financial world. In particular, the government has introduced new loan schemes and reduced the Bank of England base rate to a historic low.
- Reduce borrowing costs for businesses, which in turn leads to more borrowing being taken out.
- Increase public spending, as savers are not making any return by leaving the money in savings accounts and others feel they have more in their pockets.
In recent weeks there has been much discussion on whether the Bank of England’s base rate will go into the “red” and be negative. The effect of this will be that any bank with excess cash will be charged and in turn this will encourage them to lend more money to avoid these charges.
However, many experts feel this move will impair the banks’ appetite to lend as their profit margins will be cut. Conversely, I feel that if negative interest rates occur, we will see a quick rise in the bank’s lending margin to offset this move.
The thought of negative interest rates seems radical given that it has never been seen before in this country. However, in Japan, Sweden, Denmark, and the European central bank’s negative rates are already in place. Recently we have also seen short term government gilts giving negative returns, meaning that investors are giving the government money now, to then receive less back in two years’ time.
To fix or not to fix?
There is always discussion about whether to fix bank debt, hedge your bets by fixing one loan but not another or to leave everything at variable rates.
Given the cost of borrowing is so cheap currently, this discussion becomes more challenging. My main considerations for whether to fix or not fix are:
- How long you think you will have the debt for and the view of interest rates over that period
- Whether an increase in interest rates is affordable for the business
If the bank debt is likely to be in place over the long term (15 + years) then a fixed interest rate becomes more attractive, creating certainty of the cash outflow to finance the debt for the whole period. Breakage fees always need to be considered when fixing your debt. That is why it is crucial to consider the length of the loan.
Over the past two months, the government has introduced a few loan schemes that the banks have run on their behalf. The main two of focus are the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back loans scheme.
This scheme is aimed at all businesses, no matter the type or size, and allows them to borrow a maximum of £5 million. The loan is 80% government-backed and therefore security or guarantees are often needed.
Finance terms are up to six years and the government will cover the first 12 months of interest and any upfront costs. The loan then needs to be repaid over a maximum of a five year period or refinanced into a longer-term facility.
The lending criteria on these loans have dramatically changed since its initial introduction, and the scheme applications and approval ratings have improved as a result.
For farming businesses this loan scheme looks attractive, however, it is important to consider the short five year repayment period. Farming loan arrangements are typically 10 to 15+ years and therefore most farming businesses on the scheme would need to refinance into other products in the short term which may, at that point be at higher rates. Therefore, for many farming businesses, CBILS are not appropriate.
Bounce Back Loans
This scheme is aimed to help small and medium-sized businesses to borrow between £2,000 and £50,000. Each business’ total loan is capped at 25% of their turnover, to a maximum of £50,000.
This doesn’t mean that if your turnover is over £200,000 you cannot apply, it just means that you are capped at £50,000.
The loan is 100% government-backed and therefore the business owners do not need to provide any additional security to lenders. The loan has a fixed interest rate of 2.5% and there will not be any fees or interest to pay in the first 12 months by the business, as the government will pay this on your behalf.
The maximum loan term is 6 years – which is a one year interest holiday and then five years of interest and capital repayments. As an example, the monthly repayments due on a £25,000 loan would be £444.
In summary, these funds are very cheap and act as a fast way for businesses to raise much-needed capital.
This loan scheme, in my opinion, also provides a cheaper alternative to asset-based finance like hire purchase agreements; you are also likely to get a better deal from the dealership if you are part-exchanging old kit and then paying cash.