From conversations we have held, many SME companies who have undertaken a lease via WestWon have confirmed to us they have taken out either a Bounce Back or CBILS Loan. A number of these business owners have directly asked us asked the question, “Will my Bounce Back Loan (or CBILS Loan) affect our ability to obtain lease and asset finance in the future?”
The implications of a Bounce Back Loan on your balance sheet
Let us firstly look at the financial implications on your company balance sheet. (We have assumed you have taken out the maximum loan allowable under the Bounce Back scheme of £50,000.)
You have created a current asset, cash of £50,000. Likewise, you have added a long-term current liability of £50,000. We say a “long term liability” as the loan facility repayments will start in twelve months. Hence your Net Current Assets position will remain unchanged.
Bounce Back loans being an insurance policy or used to reduce existing debt
Quite a few companies we have spoken to have taken a Bounce Back Loan as an insurance policy. They have put this money aside and presently are not using it to fund the business. This makes financial sense and is a prudent thing to do.
Likewise, there are company directors who have used a Bounce Back Loan to clear off an existing company overdraft or to reduce an existing bank loan. Again, there is a clear financial benefit here, you are clearing historic debt down almost certainly at a higher interest rate. In the background, we know that people are using the Bounce Back Loan facility to get out of banking agreements where they have a personal guarantee.
From the perspective of obtaining a new lease, the two options above would not have any impact on your future ability to obtain lease finance.
Using a Bounce Back Loan to invest in your business
We have spoken to other companies using a loan to put down as a deposit on a commercial vehicle. Another company has used a CBILS loan to pay a rental deposit on a new building. Others have used it to buy stock or build a new website.
These are all legitimate uses for the Government backed loan and will not affect your ability to raise new leasing and asset finance in the future. However, we would like to add, we must tell the underwriter:
- Have you taken out a Bounce Back or CBILS loan?
- What have you used the loan for?
Using the loan to tide you over whilst business income has been reduced
Most companies are using the loan to help cash flow whilst sales and profit are down, again a legitimate and sensible use of the facility.
Leasing companies must lend to stay in business. If they do not lend, then ultimately, they will look to reduce costs and “wind down their lease portfolio.” The job of their underwriters is to look at all prospects customers and ask themselves one simple question, “Will this company be able to afford to make the 36/60 monthly repayments and will they still be in business at the end of the lease term?”
To make their task easier, underwriters now require most lease proposal forms to have a COVID-19 attachment. This is a one-page document that we can help you fill in. Its primary purpose is to illustrate what steps you have taken to keep trading and how the pandemic has affected your business.
So, going back to our original question using this example, will a Bounce Back Loan or CBILS Loan affect my ability to obtain leasing finance? We would say no. However, there is a big caveat here, our job is to positively explain why you have taken out the loan and more importantly, what steps have been taken to protect your business.
There are many different reasons for taking advance of a government backed loan, some positive and others negative.
All underwriters will take into account the effects on a company’s longer-term cash flow when they have to start paying back a Bounce Back or CBILS loan. Also, not forgetting how COVID-19 has affected the business.
With most new lease proposals, we will look to ask a number of questions around the impact of COVID-19 on your business and if / why you have taken a loan out.
Our job is to arrange finance for your company, our doors have always been open for business so if you have taken out a loan, please feel free to call us for all your leasing needs.