As businesses adapt to changing restrictions and start to recover from the pandemic, many are now faced with having to repay Bounce Back Loans.
Businesses are recovering at different rates and some may have to make difficult cashflow management decisions over the coming weeks and months. This is a stressful time, especially for those businesses that are in a vulnerable position due to the pandemic. To add to the pressure, many business owners are also facing individual challenges as a result of Covid-19.
Paying back Covid debt
The Government introduced Bounce Back Loans in April 2020, as part of a package of support for businesses early in the pandemic. More than 1.5million UK businesses took out loans before the scheme closed on 31 March 2021. They benefited from state-backed loans of up to £50,000, with no interest and repayments in the first 12 months.
Many of these businesses now need to start repaying this debt. The delay to restrictions being lifted means that businesses in some sectors are faced with a continued drop in earnings. Therefore, some businesses may find paying back their Bounce Back Loans more challenging than they had envisaged.
The Pay As You Grow scheme
In February, the Government announced its Pay As You Grow scheme. This provides businesses with three options: pause repayments, making interest only repayments or extending the payment terms of the loan.
You can choose to take a payment break at any time during the loan agreement. If your business does not currently have the finances to start repaying a Bounce Back Loan, you can request a six month extension. This means you will have an additional six months added to the initial 12 month loan period before you need to start repayments.
Should you decide to start repaying the loan after the initial 12 month period, you can take a payment holiday at any point during the course of the loan. This break can last for up to 6 months but this option can only be taken once. It is important to note that you will continue to accrue interest on the loan at 2.5% during any payment holiday.
Making interest only payments
Another option if you are unable to make the full repayments is to request to move to interest only payments. You can do this three times over the period of the loan and each interest only period can last for up to six months.
Extending the payment terms
Another way of reducing your monthly outgoings is to extend the payment terms to 10 years, rather than the original maximum of six. While this could help with cashflow, you will end up paying more in the long term. That is because you will need to pay 2.5% interest on every repayment after the first 12 months of the loan. The good news is that, when your business is in a better financial positon, you can increase your repayments or pay the loan off altogether. There is no fee for early repayments and it will save you interest.
We are seeing a very mixed picture across our clients as sectors recover at different rates. Some are still subject to restrictions and others are assessing how they should respond to what may be longer term changes in customer behavior. It is vital that businesses manage their cashflow over the coming months and that includes planning for repaying Bounce Back Loans.
By Kelly Davies, Director