PAYING BACK BEFORE

WE’RE A YEAR ON FROM THE FIRST BOUNCE BACK LOANS. ROSIE MURRAY-WEST LOOKS AT THE STILL-CLOSED COMPANIES ALREADY ASKED TO PAY BACK CORONAVIRUS DEBT

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’.

‘This emergency finance undoubtedly saved many small businesses in the UK’

‘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?

Bounce Back Loans explained

Bounce Back Loans were introduced to make it easier for small businesses to access the finance they needed, because the larger CBILS scheme (Coronavirus Business Interruption Loan Scheme) was providing too administratively complicated and slow for smaller enterprises.

Businesses that took out the loans received up to a maximum of 25 per cent 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 per cent 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 per cent. 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 per cent.

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 the box above 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

Keeping on the move: More than 1.4 million businesses have now taken out a Bounce Back Loan 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.