Beyond the numbers

The recovery loan scheme returns! What you need to know

Ben Brookes 30/8/2022 5 minute read

Ben Brookes FCCA, details the return of the UK government's Recovery Loan Scheme.

The pandemic is in our rear view mirror, so it would seem. You might also expect that to be the case for all the government support initiatives that were designed to prop up the economy during lockdown. Not so! Just when we thought the Recovery Loan Scheme had come to an end, so the government has gone and brought it back.

The scheme has returned, soon after ending, via a two-year expansion. The idea is this will help organisations with returning to normal trading, following all the chaos and disruption caused by the pandemic, related restrictions, the current supply crunch, and cost of living crisis.

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In this post we explain how the lending works and the key things you need to be aware of if you're considering a loan of this type.

What is the Recovery Loan Scheme? A brief history

The Recovery Loan Scheme (RLS) was created on 1 April 2021, to help organisations through, and coming out of, the Covid-19 pandemic. It was set up to replace 3 previous government, Covid support schemes, for businesses.

Originally RLS offered loans of up to £10m through bank lending, backed by a 80% government guarantee in the event of a borrower default. Then in 2022 the scheme was altered and geared more towards SMEs, loans were made available up to £2m and the government guarantee reduced to 70%.

Over the course of 15 months from its launch, less than 19,000 businesses applied for credit through the scheme. The average loan amount equated to £202,000. The lack of take up meant it wasn't considered a success and it was brought to a close on 30 June 2022.

Why the RLS is returning

Now, however, the government is re-launching RLS for another 2 years because so many SMEs are struggling to raise finance. Again, it will be provided on exactly the same terms as the revised RLS.

The reason for this is there is concern amongst ministers about the inflationary environment, and the challenge this poses to small businesses, along with a lack of access to finance for SMEs. For example, the Federation of Small Business (FSB) has reported that lending to its members has fallen to an all-time low

ONS data also suggests that 2m small business have less than 2 months worth of cash left to support their running costs. Half a million businesses are said to be at risk of going bust due to a prolonged period of rising prices. The government hope therefore that the scheme will be a valuable mechanism of support to many SMEs struggling at present.

Pros and cons of RLS 

The idea is that businesses that would normally be rejected by banks for access to finance, will be able to obtain a loan because of the 70% government guarantee behind it. This means the RLS may also prove to be cheaper than other forms of business finance, and the government guarantee should, in theory, mean lenders look more favourably at most applications.

How the borrowing is structured is up to you. It can take the form of:

  • A conventional bank loan
  • An overdraft
  • An asset-finance arrangement
  • An invoice-finance arrangement

There is also no restrictive criteria regarding how you invest and make use of the finance.

If you've borrowed through any of the previous schemes, you can still apply for further finance through the RLS. The concern amongst lenders will be how much in Covid-19 loans many of the businesses applying have racked up already? Are they now too leveraged to take on any more finance.

It should also be noted that the interest rates on the loans are capped at 14.99%. Also the lending for RLS tends to be over 6 years rather than 10, as was the case with previous Covid support. This means the monthly repayments are likely to be more expensive than some of the other emergency government backed lending that took place during the pandemic.

Personal guarantee?

If you're applying for an RLS loan, be sure to check carefully if the lender in question requires you to provide a personal guarantee. The government may be willing to meet up to 70% of the conditions of the loan however, you need to realise that legal responsibility for the debt lies with you, the borrower.

If you've not dealt with this before, a personal guarantee is an agreement between you and the lender that states that you, as an individual, are responsible for paying back the loan, should the business not be able to fulfil the liability. Banks are entitled to ask for personal guarantees from business owners and directors on lending over £250,000.

It may also be worth reviewing the market, to ascertain if you can secure a better deal, through other financial lending products that aren't backed by the government.

Raising finance through the Recovery Loan Scheme

The content of this post was created on 04/08/2022 and updated on 30/08/2022.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.


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