If your business took out one of the government-backed Bounce Back Loans (BBL) last year, then you may have been contacted by the lender about repayments.
BBL borrowers are allowed a full year without needing to meet any charges or pay interest, but once this period is over, then repayments are due. Lenders will typically contact the borrower three months before these start.
What was a Bounce Back Loan?
These loans of between £2,000 and up to £50,000 (up to 25% of a company’s turnover) were made available from May 2020 to UK businesses, which were negatively affected by Covid-19.
They were aimed at smaller firms and the loan term was up to six years with an interest rate of 2.5% set by the government. This is a rate which is considerably cheaper than most other loans and as such, there was strong demand. More than 1.5 million loans were issued and these are worth some £46.6 billion. Businesses were entitled to one BBL per individual business but only one in total if the company was a group with a holding company.
One important advantage was that these loans were unsecured, meaning that the borrower did not have to provide a personal guarantee or security such as their home.
What Type of Businesses Used Them?
With only a few exceptions, many different business types could apply for a loan and the money could be used for many different purposes. So, this could have been for supporting cashflow, clearing debts or paying off other loans if there was a higher interest rate. The key issue was that the BBL needed to be for the economic benefit of the business, although the money could not be used for personal reasons.
According to accountancy body, the ICAEW, the amount of loans is fairly evenly distributed across the UK – it said average loan values are highest in London, at £33,369, and lowest in Wales at £27,677. Those sectors which are said to have borrowed the highest amounts include wholesale and retail trade, repairers of motor vehicles and motorcycles, and the real estate sector borrowing in proportionately higher sums and with larger loan amounts of just over £35,000.
Are They Still Available?
No, they stopped being available for new applications and top-ups from 31 March 2021.
Top-ups were available from £1,000 and could only be applied for from the same lender as the original BBL. The repayment and interest-free periods also shortened if a top-up was taken out as no new period was set – the whole amount is treated as one loan and the repayment date is the same as with the original loan.
What if I Can’t Repay my Bounce Back Loan?
Even though the UK’s pandemic restrictions have eased, many businesses are still affected by reduced trading and other disruption. It has been difficult to forecast and this means that some may feel they are unable to start making their repayments. The government has recognised this and so introduced a number of options for businesses who are struggling to make repayments under the Pay As You Grow scheme.
What is the Pay As You Grow Scheme?
This was introduced by Chancellor Rishi Sunak in September 2020. It means that firms who have started repaying their BBLs can:
- Ask for an extension of their loan term from six years to 10 years, which will be at the same fixed interest rate of 2.5%
- Cut monthly repayments for six months of the loan term by only paying the interest. This option is available up to three times during the loan term
- Take a repayment holiday for up to six months – this is an option that is only available once during the loan term.
The above options may be used individually or in combination with each other. However, companies should be aware that if they do use one or more, then they will pay more interest overall and the length of the loan term will increase.
How can I access the Pay As You Grow scheme?
It is up to the individual lenders that provided the BBLs to contact customers directly. They should provide borrowers with details on the Pay As You Grow scheme.
Who Should use the Pay As You Grow scheme?
The scheme is ideal for businesses that need some breathing space and believe they can deliver a stronger financial performance in the months to come. Overall, borrowers must be aware that they are fully responsible for the debt and will need to find some way of making the repayments at the agreed time.
Can a Bounce Back Loan be Repaid Early?
Yes, this is possible and the borrower will not have to pay any early repayment charges if they choose to pay off the debt before the loan term ends.
Will Pay As You Grow Stop me Borrowing in the Future?
Taking a payment holiday or extending the length of a loan under Pay As You Grow, should not necessarily affect a company’s credit rating, but it may be taken into account when it comes to decisions on future borrowing.
A lender will look at the company’s existing commitments in terms of its borrowing, incomings and outgoings. If it appears that a company is overstretched, then further lending may be refused and extending a loan through Pay As You Grow, may be seen as a factor in this. A lender may also register the Bounce Back Loan with credit reference agencies and if there is a default on payments, then this could impact on credit rating..
When Should I Make a Decision on the Pay As You Grow Scheme?
It may take some days or longer for the preferred Pay As You Grow option to be approved by the lender. If the borrower wants to go ahead and reduce or stop their payments, they should contact the lender as soon as possible so that the request is agreed and processed in time to reach the next monthly payment date. As with all borrowing, it is important to communicate with lenders at the earliest signs of when there could be a repayment problem – and if possible, take advantage of any ways that make debts more manageable.