Banks have been told they cannot charge more than 2.5% interest on a new batch of emergency coronavirus business loans to be launched on Monday as part of efforts to support struggling firms during the pandemic.
In a letter sent to British lenders overnight, the Treasury also confirmed that the bounce-back loan scheme (BBLS) would be excluded from stringent consumer protection laws in order to speed up the process of getting money to small businesses.
“As a 100% guaranteed loan scheme, the price of BBLS is critical to its success: together, we need to ensure that these loans are affordable and accessible. As such, and incorporating a range of data, I have come to the decision that the rate should be set at 2.5%,” the chancellor, Rishi Sunak, said in the letter.
The Bank of England would also extend a term funding scheme for UK banks that provides additional incentives to offer cheap loans to small and medium-sized businesses, he added.
“As I have previously stated, it is vital that all necessary action is taken to ensure that the benefits of this scheme, and all other measures from government and the regulators, are passed through to businesses,” Sunak said.
The announcements follow lengthy discussions between the Treasury and UK lenders, which are expected to continue throughout the weekend before the scheme is formally launched on Monday morning.
The BBLS, which Sunak announced last week, offers 100% government-backed loans capped at 25% of turnover. It will be the only emergency loan programme to come with a standard interest rate, after an initial 12-month interest and payment-free period.
It is also the only programme to come with a 100% guarantee, which means the government will cover the bank’s losses if a customer defaults on their loan. The other schemes are covered up to 80%. Businesses will be able to apply through a short online form, meant to speed up the pace of approvals.
Lenders have been accused of failing to distribute funds fast enough in recent weeks, with figures showing they approved less than 50% of the 52,807 applications for the existing coronavirus business interruption loan scheme (CBILS).
Stephen Jones, chief executive of the banking lobby group UK Finance, said bank staff were “working incredibly hard to get money to those viable businesses that need it”, and that lenders were working at pace to get the new scheme up and running.
Some banks feared the fast-track application for BBLS would mean having to cut corners on affordability checks that would put them in breach of the Consumer Credit Act. The Treasury confirmed, however, that it would introduce retrospective legislation which would allow them to skip those checks to try get money to businesses faster.
Kevin Hollinrake, a Conservative MP and co-chair of the all-party parliamentary group on fair business banking welcomed the Treasury’s announcements, saying the standard interest rate was “fantastic” for small firms. He also said that changes to consumer protection rules were reasonable.
“In the current circumstances, business people will have to take a risk to get through this,” he said.