Bounce Back Loans for businesses facing difficulty due to the Covid-19 pandemic have one important criteria to meet. If you do not meet these tests, you will be unlikely to qualify. Our founder Tony McNally looks at one of the tests and offers his take on it.
The British Business Bank (BBB) has been the tasked with deciding who will be eligible for these types of loans administered by the banks.
There is a very important test that needs to be passed before the loan can be justified and made. It is whether or not the business was in financial difficulty as of the 31 December 2019.
The extract below is taken from the BBB website and I’ll try and explain in layman’s terms what this will mean.
“A business is considered in difficulty if met any one of the following criteria on 31 December 2019:
- Individuals or companies that have entered into collective insolvency proceedings;
- Limited companies which have accumulated losses greater than half of their share capital in their last annual accounts (this does not apply to SMEs less than 3 years old);
- Partnerships, limited partnerships or unlimited liability companies which have accumulated losses greater than half of their capital in their latest annual accounts (this does not apply to SMEs less than 3 years old);
Where the undertaking has received rescue aid and has not yet reimbursed the loan or terminated the guarantee, or has received restructuring aid and is still subject to a restructuring plan;
A company which is not an SME where for each of the last two accounting years: i) your book debt to equity ratio has been greater than 7.5; and ii) your EBITDA interest coverage ratio has been below 1.0”
Some of the terms used in the extract are self-evident if you are in banking or corporate finance. But I’m guessing that the majority of SMEs who would like to take advantage of this type of loan wouldn’t know what book debt to equity ratio is or what EBITDA interest cover is.
For this blog, I am going to concentrate on the ineligibility of an SME with accumulated losses greater than half of their share capital in the published accounts.
Where is the share capital found in my numbers?
In the balance sheet usually in the bottom half and this depicts the amount of capital introduced during the life of the business. These are usually ordinary shares or preference shares at a nominal amount multiplied by the number of shares in issue. So if you have 100 shares at £1 then the amount found in the balance sheet will be £100. This is shown as a credit in the balance sheet.
What about accumulated losses?
Profits and losses retained in the business can also be found at the bottom half of the balance sheet. These are the profits or losses reported each year of the company’s existence.
- If there were profits of £500 in year 1 and losses of £300 in year 2 then accumulated profits shown in your balance sheet will be £200.
- However, if you had losses of £500 in year 1 and £300 in year 2 then accumulated losses will be £800.
If you are in scenario 1, then congratulations! If you wish to apply for a Bounce Back Loan then you should satisfy the eligibility test. And if you want to take on debt then, depending upon the lenders involved, you should obtain this type of loan quite quickly.
If you are in scenario 2 then accumulated losses should not be more than 50% of your share capital in order for you to still qualify. So, for example, if share capital was £100 then accumulated losses were £50 then the ratio is 50% and you are still eligible.
All is not lost
But what if your accumulated losses were more than 50%? All is not lost. You can still apply as long as you are not in receipt of state aid at the de minimis level, as laid out by the EU.
For a lot of businesses state aid in the forms of grants and/or subsidies are well within these levels and so as long as the application form answers are consistent with reality then it will be considered.
It is the lender who will have the final say but you are not restricted to your current bank to apply.
Other banks may want you to move your banking arrangements to them and other corporate finance lenders will not see this as a requirement.
Tony McNally is the founder of Guidon Group, a Chartered Management Accountant in Stockton on Tees. For more information, contact us.