Recovery Loan Scheme (RLS)

What is the Recovery Loan Scheme and how does it work?

The Recovery Loan Scheme or the RLS came about just after COVID, when we started opening the doors and businesses started to get back on their feet.

It’s essentially a government backed loan for small and medium-sized businesses. They could choose whether to invest it, use it to grow, or cover staff or machinery. It’s really there as a support mechanism to help businesses overcome the impact of COVID since 2020.

How does the Recovery Loan Scheme differ from previous government backed loan schemes?

It does continuously change. There are always new rules, new alignments or new criteria. How it essentially differs is that it really focuses on small and medium businesses, where they could use it as an unsecured loan for working capital and investment.

The criteria has become a bit tighter now, simply due to the sheer volume of applications, but the lenders and banks offering RLS loans are proceeding now with a lot more confidence. Plus, of course, these loans are government backed up to 70%.

What are the eligibility criteria for businesses to access the Recovery Loan Scheme?

First of all, you’ve got to be a business in the UK. It’s not available to foreign entities or businesses. You’ve got to have a turnover of about £45 million or less, and you also need to show that your business is not in any financial difficulty.

In other words, you’re not in an IVA. you’re not winding down and you’re not bankrupt. As of July 2024, Recovery Loans cannot be used to buy any property. It is specifically there for working capital and investment in your business – such as buying machinery.

As long as you have a viable business, the amount you could borrow is up to around £2 million per business. Of course, you’ve got to have the financial strength to afford that loan – that’s important to say. If you’re not a bank or public sector organisation, you will fall within a wide window of eligibility.

What are the maximum loan amounts available under the Recovery Loan Scheme?

For UK businesses it’s £2 million and in Northern Ireland it’s a lot less than that – around £500,000 per business.

Borrowers need to be aware that this is an unsecured loan, which could come in many forms. It could be an overdraft product, asset financing or invoice financing. If you’re unsure what these are, have a look on our website.

So even though it’s an unsecured loan, it is distributed through these different products. For asset finance you could borrow up to £2 million and the same for invoice financing. But for overdrafts, it could be different, depending on the financial strength of your business.

Are there any specific terms and conditions associated with the Recovery Loan Scheme that businesses should be aware of?

The eligibility does offer a wide window for applications. The maximum term for the loans or asset financing are up to six years.

Businesses should be aware that this is a means to an end. Just because this scheme is government backed, it doesn’t necessarily mean these are the cheapest sources of financing on the market. I have seen some pretty high rates.

It’s there to support businesses and it’s great that we have it, but there must be an exit strategy. There must be a reason for why you are growing. Six years is quite a short time – how are you going to exit that loan?

Chances are, you won’t be eligible for another Recovery Loan, so you’ll have to move on to the retail side of refinancing. That could cause huge disruption to your cash flow if you’ve not managed to figure out an exit strategy.

How long is the repayment period for loans obtained through the Recovery Loan Scheme?

Six years is the typical term for the unsecured loans and for asset financing. For invoice financing facilities, I’ve seen 12 months to three years. For overdrafts, it does vary, but I shouldn’t think it’s more than three years.

Is there a grace period before businesses need to start repaying their Recovery Loan?

There used to be, with the bounce back loans if you remember those back in 2020 or 2021. There was a grace period, but unfortunately for today’s Recovery Loan Scheme, it’s business as usual.

As soon as the loan is sanctioned and issued and you’ve drawn down, the loan becomes payable.

Can businesses apply for the Recovery Loan Scheme if they have already received loans through previous government backed schemes?

A couple of my clients have had bounceback loans back in 2021, and they refinanced these onto RLS loans.

The bounceback loan was pretty much an unsecured loan. With an RLS refinance, we managed to secure it against assets or invoices, so it was a more structured way of repaying the debt.

So previously, yes, there was the ability to refinance from earlier schemes. Today, in 2024, I believe lenders issuing the RLS loans are a little bit more discerning about the reasons you could refinance – or take out a second Recovery Loan Scheme if you’ve already taken one previously.

There would have to be a very detailed justification on why it’s not been paid back, or why there’s still a huge outstanding amount. It does depend on the circumstances of the individual business, but it’s become harder to take out a second Recovery Loan to replace the first.

Are any specific sectors or industries excluded from the Recovery Loan Scheme?

Yes – banks, building society, insurers, and funnily enough, finance brokerages.

What documents and information do businesses typically need to provide when applying for the Recovery Loan Scheme?

A set of accounts – the more the better. If you’ve got three years worth of accounts, that’s very helpful. You may only have one year’s set of filed accounts, in which case the lender or your intermediary will need that.

If you’re a startup, of course you won’t have your accounts yet, but you could work with your accountant to draft a projection. It will be very specific to the applicant and the type of business.

For example, if your business offers temporary recruitment, your projection would be based on the amount of manpower and hours that will be documented. That could be projected quite easily.

But if your business sells widgets and you’re relying on your sales team, you’ve got to be realistic – how are you going to be selling them, where and what’s your market size? It’s all down to how you present yourself – and your numbers need to back that up.

Don’t rush into this decision. A lot of people get RLS loans because it’s comparatively easy compared to retail loans. But the problem is in how you keep up with those monthly payments, and what happens at the end of the term and you have no exit.

How long does it typically take for a business to receive the funds once they’ve been approved for the Recovery Loan Scheme?

It’s usually 24 hours. Once a lot of the underwriting is done during the application phase, it gets sanctioned and after that you could usually draw down within 24 hours. That’s on an unsecured loan basis. That’s cash in the bank.

If you’re structuring your RLS loan invoice financing, once the facility is there and you’re ready to start submitting your invoices, that’s instant. That’s within 24 hours.

If it’s for asset financing and you’re looking to buy a piece of machinery, it’s again instantaneous. The loan is there to help you buy the asset. It doesn’t take long to actually get cash in your bank, to help you buy what you need or take cash out of your invoices.

Are there any interest rates or fees associated with the Recovery Loan Scheme? If so, how are they calculated?

It really varies. What people don’t know is that the RLS scheme is a product that’s distributed via many different retail channels. Many high street banks could issue RLS loans, and some investment funds or local businesses that specialise in startup loans could also offer it.

The fees, interest rates and setup costs possibly all vary. Before you take a loan, make sure you get a clear breakdown and structure of how it works. Just because it’s government backed, that does not make it cheap.

Can businesses use the recovery loan of funds for any business related expenses or are there restrictions on how the funds can be used?

There are not many restrictions, as long as it’s all above board and it’s not illegal activity.

The one clear cut restriction is that you cannot use an RLS loan to buy property. I had one client who wanted a commercial mortgage, and he was going to use an RLS loan as his deposit.

Of course, that would have meant he was putting no money into the purchase. I had to let him down, because we cannot use an RLS loan for that purpose. It cannot go towards the purchasing of property.

What happens if a business is unable to repay the recovery loan? Are there any consequences or alternatives available?

If you are not able to repay any of your loan, seek advice from your lender or contact the intermediary that helped arrange your loan.

The lender wants to work with you to help your business thrive. Nobody wants to go through the hassle of a winding down order or bankruptcy charge.

Transparency really is key. Talk to the lender, the earlier the better. Do not leave it until the loan is at the end of its term – that pretty much kills off any option to try and work with your lender.

If you’ve exhausted your options with the lender or you don’t feel you’re getting support, you may want to consider refinancing with a retail lender like a bank. But it won’t be an RLS loan. It would be a more structured loan using assets, invoicing or overdrafts.

When you get an RLS loan, you’ve got to have a clear plan. If you’re going to invest it, spend it or boost cash flow, you must always be thinking, how am I going to exit this? Try and give yourself one or two backup plans.

Hopefully everything will fall into place, but if it doesn’t, at least you could tell your lender what the backup plans were and how you were going to exit. They may understand that reasoning and agree to support you for a little bit longer.

If you just want a loan for the sake of it, but you have no clear way to pay it back, then you are not in a position to take out an RLS loan. I really need to stress that.

Is there a deadline for businesses to apply for the Recovery Loan Scheme?

The Recovery Loan Scheme comes out in tranches, or programmes. We’re currently in July 2024. The previous Recovery Loan Scheme ran from April 2021 to the end of June 2022.

There are windows when the RLS loan is open, then it closes and you have to wait for the next loan window to open.

What else do we need to know about the Recovery Loan Scheme?

I’ve had many clients enquire about the RLS loan, and it is a great product with a wide window of eligibility. It opens up the possibility of people getting the investment they need, whereas once upon a time they needed seed funding or to take out debt at high rates or shark loans to keep their business afloat.

So I am grateful that RLS loans exist. But because they are so easy to obtain, people often overlook how they will exit or structure that loan so they could repay it back safely.

That is one of the clear differences from retail loans, where it’s got to be secured or it’s got to be for buying machinery. The RLS loan it’s just a little bit more relaxed on the criteria front.

Because of that, it could help a lot of people do a lot of things, but just because it’s easier to get the funding, it’s no less dangerous than a loan from anywhere else.

So please think about your exit strategy, how you’re going to pay it back and spend it wisely. Once it’s gone, the chances are you won’t get another one.

Commercial mortgages are not regulated by the Financial Conduct Authority.