Businesses that took out Bounce Back Loans in April 2020 are now being asked to repay the money they borrowed, despite the fact that many are far from fully open and most are still struggling with a difficult trading environment amid restrictions.
The first of these loans, which are now held by more than 1.4 million businesses, were taken out a year ago, and business owners who applied for them are now being approached by their banks to begin to pay them back.
Michelle Ovens, director of Small Business Britain, says the loans have ‘been vital in supporting businesses across the UK to keep going’.
‘The provision of this emergency finance undoubtedly saved many small businesses, giving them confidence and optimism,’ she adds.
But as the scheme, which closed to new applications on March 31, comes to an end, how should the businesses that took out the loans deal with the need to pay back their finance, and what will happen if they can’t?
What is a Bounce Back loan?
Bounce Back Loans were introduced to make it easier for small businesses to access the finance they needed, because the larger Coronavirus Business Interruption Loan Scheme (CBILS) was providing too administratively complicated and slow for smaller enterprises.
Businesses that took out the loans received up to a maximum of 25% of annual turnover, capped at £50,000.
Loans were available to businesses without a business bank account, and applicants could self-certify that they were affected by Covid-19 in order to receive the funds.
The loans were particularly popular with very small businesses, with figures from the government showing that 90% of the loans went to ‘micro businesses’, with a turnover of less than £632,000.
For the first 12 months, the loans are interest-free, but thereafter interest is charged at 2.5%. The government has also recently increased the possible repayment period from six years to ten.
The loans are unsecured and backed by the government, meaning that if they are not paid back, borrowers are unlikely to lose their homes.
The National Audit Office has warned this means that borrowers have limited incentives to pay back the loans and that lenders have limited incentives to chase them.
However, the government has stressed that businesses that do not pay the loans back might limit their ability to borrow in the future as they will have poor credit ratings.
To repay, or not to repay?
Unless you pay the loan off in full immediately after 12 months, you will start accruing interest on the balance at a relatively low 2.5%.
Simon Michaels, CEO of business solutions at accountants HW Fisher, says this is a ‘very attractive rate’ so if you have other loans, there’s no need to prioritise paying this one back straight away.
Businesses have several options, as detailed in the box above, and these have become more flexible since the loans were taken out.
Simon says that many banks have not yet let borrowers know about the full new range of options for the loans, which include deferral and a longer borrowing term, so it is worth having a conversation with your lender if you feel it would be more attractive to keep borrowing for now.
Asem Din, partner at Adds Accounting, says that he has many clients whose loans are coming due, and that they are considering a number of repayment options.
The government’s Pay As You Grow additional guidance on Bounce Back Loans means that some are choosing to defer the loans for a further six months, while others are choosing to pay only the interest on the loans rather than begin paying back the capital. See below for the full range of options for holders of the loans at this point.
The limited company problem
According to Asem the borrowers who need to consider a full repayment strategy are those whose limited companies borrowed the money, but where the money has been withdrawn to spend on living costs for the directors.
Where the business has not made profits, these withdrawals count as a Director’s Loan and will incur a large tax charge if it is not paid back. ‘It is a ticking time bomb,’ he says, advising those directors in this position to speak to their accountants and make plans to deal with the issue as soon as possible.
In other cases, Asem says, repayment decisions will depend on the type of business, the amount of money currently being made and any investment needed to get the business open again.
A case-by-case basis
As lockdown begins to ease from this week, and it becomes increasingly clear how fast various sectors might open, businesses may find it easier to know the best route for their Bounce Back loans.
Michelle, at Small Business Britain, points out that a third of small businesses saved the cash as a buffer, which means that they may be in a position to pay it back immediately. However, Simon at HW Fisher, says that in many cases it is not worth rushing to pay it back.
‘It is cheap money,’ he points out, adding that he expects there will be a lot of defaults on the loans going forward due to their unsecured nature and the fact that people were able to self-declare their need for the money.
Cheryl Sharp, founder of accountancy practice Pink Pig Financials, adds that those who are worried about how, and whether, to pay the loans should start by doing a cashflow forecast, modelling how their business would fare in each repayment scenario.
‘The banks are starting to email out more details on the options above and how to apply. If they’re not happy modelling out the scenarios then speak to an accountant who can help with this,’ she says.
Whatever borrowers decide to do, balancing up debt versus the costs of reopening and thriving going forward is far from simple.
Making sure you understand all of the options for your Bounce Back Loan will help you make the right decision for your business.
Got a Bounce Back Loan? These are your repayment options
If you took out a Bounce Back Loan, the first 12 months of your loan should be interest free.
After this point, interest is charged at 2.5% on the loan and you are expected to start repaying it.
But there are several repayment options…
1. Repay it all now
You can repay your Bounce Back Loan whenever you like without incurring early repayment fees.
2. Begin to repay your loan over six years
Originally, all Bounce Back Loans were scheduled to be repaid over six years, with each repayment 1/60 of the capital plus the interest on the loan that has built up that month. Because of the way that this is structured, you pay more in the first months than the last.
3. Extend the term so you pay the loan off over ten years
The government’s new Pay As You Grow’s plans for Bounce Back Loans allow you to stretch your repayments over a decade, making a total of 108 repayments instead of 60.
4. Defer your loan repayment for six months
Under the Pay As You Grow plans, you can immediately ask to defer payments for six months, or do so later during the term of the loan.
5. Ask to make interest-only payments
Borrowers can pay only the interest on their loans for six months, and can opt to do this three times throughout the term of the loan.
Still can’t pay? If borrowers cannot pay the loan back, it is worth noting that the loan is ‘unsecured’, which means that the bank cannot take your home if you do not repay, and will find it harder to take other assets.
The government’s own press release on the loan repayments notes that the regulator’s rules ‘require lenders to show due consideration and appropriate forbearance to borrowers in difficulty.
‘It is tricky. I don’t have bookings until the autumn’
Kate Lieberman has a ten-year-old business making wedding and artisan cakes.
Since the pandemic hit, the South Oxfordshire-based baker has branched out into delivering ‘treat boxes’ and baked items. She took out a £5,000 Bounce Back Loan from NatWest.
‘I used the money to pivot,’ she explains. ‘I’ve done my best, but things are tight at the moment and there are still a lot of questions about when big weddings will be allowed again.’
One year on, Kate has received emails from NatWest notifying her of the fact that the loan needs to be paid back from June.
She has not been given any other choice but to start repayments by standing order, and is wondering if she can use other options to keep from paying off the loan for longer. She has applied for a grant from the South Oxfordshire Council but is not yet sure if she will get anything.
‘Starting up again making the cakes will be expensive, and I’ve not got bookings until the autumn and there isn’t much certainty. It seems like a tricky time to be making repayments,’ she says.
‘I don’t want debt but I need some cash to try to grow my business’
Lauren Reading runs Truly’s Restaurant in Bournemouth, and is currently preparing to reopen in May.
However, repayments on her Bounce Back Loan are due in May, and although she’s worried about keeping on debt, she feels concerned about giving up her financial cushion.
‘I just have no idea what our business performance is going to be like this year so I don’t want to commit to big payments each month,’ she says.
‘I want to pay it off as soon as possible but also I need to keep hold of some cash to try and grow my business.
During lockdown, Lauren branched out into delivery services for fruit, vegetables and other necessities but in terms of her restaurant, she explains that if rigid social distancing rules continue it will cut the number of people she can have in her premises as she reopens so she does not know how long it will take to recover.
‘It’s a dilemma,’ she says. ‘No one can tell us what happens next so it’s hard to be prepared for it.’
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