Loan scheme is 11.36 per cent above residential lending
I'LL be sticking with guidance through the coronavirus over the next few weeks as its turmoil knocks businesses and family's globes off their axis.
Today I'll focus on the Coronavirus Business Interruption Loans Scheme (CBILS). And in short, if you can avoid it, don't do it.
New Order had the hit record of ‘Love Will Tear us Apart'. Great tune, but it should be ‘debt will tear us apart'.
All debt should be manageable from the outset, otherwise we can easily say it is odious, ie set up to fail to claim assets from the borrower. Greece will verify that.
The moral principle of any debt should be that at the point of lending, or at default, that if debts cannot be paid without the (potentially designed objective) radical transfer of property from debtors to creditors, the loan should be deemed a bad loan, and eased to be more affordable, whilst the borrower carries on a normal life.
Loans are sometimes therefore given when they shouldn't, and assets are lost that shouldn't.
This scheme has Greece written all over it.
Businesses can apply for lending if they wish to see them through this remarkable situation.
You can apply to over 40 lenders (listed on the British business bank) for term loans, overdrafts, invoice financing and asset finance.
The scheme is a government backed guarantee, primarily to encourage lending. The scheme is free of charge for setting up and offers one year interest free as it's paid for by the government.
The guarantee however is to protect the lender, not the borrower and you are always 100 per cent responsible for the debt.
The rate is set by the lender, not the government, and is at lender discretion.
I've been on hold for most of the day to a range of banks to get their view of rates and whilst the music is lovely, the first one offered a rate of 12 per cent over base rate. Read that again.
I'm led to believe the rates are not too dissimilar. Naturally, a business could apply for the loan now and refinance in 12 months, but we all know how that credit revolving door ends (credit card fiasco).
The scheme is pretty much in line with the enterprise finance scheme in terms of guarantee. The government guarantees it, but it's the bank that's guaranteed, not you.
The lender will come to you first and look for repayment wherever they can get it, and when that is exhausted, they will go back to the government.
Nicely placed on the website is a line which states that your primary residential home cannot be used as security, but that is quite irrelevant as it automatically becomes the security if your business assets don't cover your debt.
Directors of a limited company have their personal assets protected under limited liability but those who have personal guarantees have no protection.
Unsecured lending is available on the scheme up to £250,000 but the lender has the discretion to enforce personal guarantees which they are doing.
So, in one foul swoop, many unsuspecting businesses could be lured into losing their family homes and assets whilst paying an expensive rate.
If the government had really cared a jot, they should have enforced a max rate of interest.
Instead this is the tax payer refinancing the banks through expensive loan rates.
There are a range of grants available so borrowers should look there first before moving elsewhere.
Next, consider if you really need the money. It comes at a price.
If you need/wish to borrow and will be subject to a personal guarantee, you may as well borrow at a tracker rate on your personal home. As mentioned two weeks ago, that rate was 0.64 per cent above base rate, not 12 per cent.
If your home is liable on either, it's better to be on the lowest rate and inject that into the business.
Be sure to speak to your accountant about any tax breaks that will offer.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you would like any advice on your financial situation, for a complimentary initial conversation call Darren McKeever on 028 6863 2692, email email@example.com or visit www.wwfp.net.