Can you use Bounce Back Loans for property investment? And will it affect my attractiveness to lenders in the future?

What is a Bounce Back Loan?

Bounce Back Loans are one of the available options of state-backed financial aid available to businesses during the coronavirus pandemic to help keep them afloat through these challenging times. 

The loans are available at between £2,000 and £50,000, capped at 25% of the business’ total turnover for the previous financial year, or – if the company is less than 12 months old – at the predicted turnover for the following financial year, with rates rising to 2.5% per year when the repayments begin. 

In addition, businesses will be offered the chance to take payment holidays or switch to interest-only payments for a period of time during the loan term, if needed. There is no interest charged to the borrower for the first 12 months and no repayments needed either for the same period. The loans are issued for up to ten years, and there is no penalty to repay the facility early. 

Between May and July alone, more than 860,000 Bounce Back Loans were issued, with figures now reaching well over one million to date.

Bounce Back Loan Purpose

The purpose of the loans is to help pay the salaries and running costs of a business during periods of closure, or to help the business create value to achieve the same objective. They’re not intended for the purchase of hard assets such as property. 

There have been reports of some lenders accepting Bounce Back Loans as a form of deposit if moved between two companies as an inter-company loan (a loan from one of your companies to another one of your companies) – which to me is madness. On the other hand, it would be delusional to think that some property investors aren’t using the state-backed aid for just that purpose. Purchasing property. 

Conversely, while these loans were extended and backed by the government for the purpose of helping people continue as normal, not all lenders see it like that. Many property investors have reported difficulty in securing mortgages as a result of taking out the finance. It may seem against the spirit of the government assistance for lenders to choose not to lend to investors for taking out these loans but – in their minds – it’s still credit that could demonstrate a lack of strength to “ride out the storms,” therefore making the investor insufficiently credit-worthy.  

Lenders really want to ensure that companies are not facing on-going challenges which could put the mortgage at risk. I know, ludicrous. So make a note: some lenders won’t take kindly to firms having sought this kind of assistance, even during the extenuating circumstances of an economy-crushing, global pandemic. These lenders won’t take into account the fact that some businesses may use the finance as a “just-in-case” measure, even if they don’t need it at all.

As a business owner, I find it repulsive that some property investors are knowingly using this finance to purchase properties (yes, properties for £50,000 do exist, people). This finance is for growing employers. 

On the other hand, these loans are intended to help carry out normal business activities, which  I appreciate for some might be property development. So I guess, in some circumstances, refurbishment and construction work would constitute normal business activities. So, in my opinion and in these circumstances, this would be a permitted use of the funds. But read through any Bounce Back Loan terms and conditions and, more often than not, you’ll see that there’s a specific mention that you cannot purchase property with the loan proceeds. 

Like anything new and uncharted, there’s always a huge grey area. And it doesn’t help that some well-known property speakers and “trainers” are openly telling people that the finance is “free money” that you “don’t need to pay back.” It just goes completely against not only the spirit of the help, but also normal, logical rules of how a loan works!

According to some sources, this has had the effect of pushing up house prices in the north, where investors are marching to hunt for properties with £50,000 burning a hole in their pockets. Some estate agents are reporting that there are properties worth £40,000 selling for £50,000 just because these novice investors have the money.

The British Business Bank, which is overseeing the Bounce Back Loan scheme, has a team that monitors potential fraud. So I guess it will be a matter of time before these people are found out, or by that time will the damage be done?

My advice – use these loans for their intended purpose, ie: keeping your business afloat, not to add to your property portfolio. 

Disclaimer

The author is not an accountant or finance professional. You should always discuss your personal circumstances with an accredited broker or finance professional before making any decisions.