Bounce Back Loans...
Repayments for Bounce Back Loans loans are now starting, following a series of flexible payment deferral options including the Pay as You Grow scheme. How are businesses coping?
Bounce Back Loans (BBL) were introduced during the Covid-19 pandemic to provide financial support to small and medium-sized businesses. Under the scheme, eligible businesses could borrow between £2,000 and £50,000 at government-guaranteed low rates of interest.
BBLs were intended solely to benefit the business itself, whether to purchase equipment, protect jobs or help ease cash flow issues. However, there have been numerous cases of Bounce Back Loan fraud and other abuses where loans were used for personal benefit or taken out for non-existent companies.
Businesses entering repayments have several options:
Repay the loan over a period of 6 or 10 years in monthly instalments.
Repay the loan early without facing early repayment charges.
Pay interest-only repayments over a six-month period (this can be done up to three times during the duration of the loan)
Pause repayments for up to six months.
Repayments can strain cash flow so draw up short-term rolling forecasts to avoid surprises
In some cases, the need to repay these loans is putting a strain on cash flow. Any interest-free periods are likely to have expired and where capital payment holidays were granted, these are likely to have ended. There are headwinds that are impacting cash and the ability to repay, including supply chain and raw material issues, excessive stocks locking up cash flow in working capital, the cost of energy and utilities, wage pressures and general inflationary concerns.
Some businesses are considering repaying in their entirety if cash flow permits. Most businesses are making timely repayments and some are actively seeking restructuring and re-phasing of the loan terms.
Next steps: Where cash is stressed, the fundamental approaches to cash flow management should never be neglected. Short-term rolling cash flow forecasts should be drawn up, reviewed and updated while stakeholder management is key so as to avoid surprises. The debt may be able to be rescheduled to ease cash flow issues, but the best remedy is to consult guidance and advice early.
Verdict: Repayments can put strain on cash flow so draw up short-term rolling cash flow forecasts to avoid surprises.
Businesses that cannot repay Bounce Back Loan may need to consider Creditor’s Voluntary Liquidation (CVL)
Many company directors are currently seeking advice from their accountant because of a Bounce Back Loan (BBL) they took out and can’t afford to pay back.
Some are opting to dissolve their companies. But any attempt to dissolve a company with an outstanding BBL will almost certainly be opposed by the bank. Directors have said that their bank told them they needed to put their company into Creditors’ Voluntary Liquidation (CVL).
A BBL is secured by the Government, so under CVL, the bank can pursue the Government to get a full repayment of the loan.
From the director’s point of view, a CVL is normally the best option. This is true even when some of the BBL was misused to pay off household items, like a mortgage.
The part of the BBL that was used correctly for business purposes will be written off in the CVL. Any part that was used incorrectly, will need to be repaid. In such cases, the liquidator will set up a repayment schedule to enable the director to pay it back in an affordable and timely manner.
Next steps: Businesses that cannot afford to repay the loan should seek advice from their accountant and an insolvency practitioner.
Verdict: Consider the CVL option as an alternative to dissolving the company, especially if BBL is outstanding.
Businesses who factored in repayments into their forecasts are managing much better
I have two clients who have now gone into insolvency, so they aren’t repaying any of this debt.
The ones that are repaying say they feel grateful for the lifeline, yet are now struggling to balance repayments alongside hugely increasing prices elsewhere in their businesses.
One client has been trying to renegotiate payment terms, but their bank is not entertaining any changes as the rates were already favourable to begin with. Some are looking to add more value to existing clients to generate additional income to help cover the cash needed for repayments. Others are cutting costs elsewhere.
Overall, those who factored the repayments into their forecasts are managing much better.
Taking on any financing arrangement always needs consideration before you sign. I always compare this to entering the yellow boxes on the road to my clients – you need to have a clear exit before you go in.
Next steps: Step ‘outside’ your business and take an objective view of how the finances look. What bills have you got coming up?
What does your cash flow forecast look like?
What’s the income and cost pipeline looking like?
I always advise that it’s important not to be short-sighted and just focus on cutting costs to save cash – redundancies are not always the smart move.
Verdict: Businesses who factored in repayments into their forecasts are managing much better.
Businesses should consider short and long-term cash needs before repaying Bounce Back Loan
The Bounce Back Loan was seen as a cash windfall in a time of need. A self-certifying application enabled business owners to apply for a loan within minutes with little finance experience required. Many didn’t consider the consequences of repaying the loan and the cash impact further down the line.
There was a misunderstanding among borrowers who believed a government-back loan was not like any other loan and was more favourable to the borrower. In fact, Government support was really there to protect the banks – if a borrower was unable to repay the debt, then the bank was protected by the Government.
There were two schools of thought with borrowers: they either applied for the loan and took advantage of interest-free funding for one year and on the anniversary of the loan repaid the capital, and those that used the funds to survive or grow the business.
Nevertheless, this loan came with no personal guarantees and low-interest rates of 2.5%. Although some clients have taken the decision to repay this debt, many continue to use this facility as additional working capital.
Next steps: As we approach what is believed to be difficult economic conditions, these additional funds could be welcome. The repayments are spread over 6+years making both capital and interest manageable. With competitive interest rates and attractive repayment terms, borrowers should consider their cash needs, both now and in the future, before repaying their Bounce Back Loan.
Verdict: Businesses should consider short and long-term cash needs before repaying a Bounce Back Loan.
Treat BBL as any other loan and stick to repayment terms – but don’t repay early
Bounce Back Loans aren’t causing any additional issues for our clients over and above existing stresses from running a business in today’s financial landscape of inflation, rising interest rates, Brexit and the ongoing war in Ukraine.
Those with Bounce Back Loans have benefitted from a year’s holiday before the repayments began and have used their loan to help bolster working capital. In fact, some of our clients have already repaid their loans in full.
The interest rate for repaying Bounce Back Loans is minimal in comparison to most other types of finance. As long as a business’s cash flow is generally not overstretched, repayments shouldn’t cause big issues. If it is, then a wider look needs to be taken at the business’s cash flow and cash position.
Next steps: Business owners should follow the same principles as any other type of loan by staying within the repayment terms or it will impact their credit rating.
Some accountants may advise paying off the loan early, but I wouldn’t advise this: the cost of the loans is cheap in terms of interest rates, compared to other finance options, so if there is still money left, I would advise using it – whether for investment, marketing, or as working capital to enhance the business.
Verdict: Treat BBL as any other loan and stick to repayment terms – but don’t repay early. Interest rates are relatively cheap – so make use of any money left for business benefit.