Partner Article

Peter Kelly – director in the corporate finance team at PM+M – discusses why businesses need to be ready to pay back their Bounce Back Loan

As the Bounce Back Loan Scheme (BBLS) ended on 31 March 2021, 1.5million businesses had taken advantage of the scheme, translating to around 25% of all UK businesses with a total borrowing of £46.5bn.

However, as different sectors and businesses have reopened at varying times due to the loosening of restrictions, and with recovery at different rates, some borrowers may have difficult cashflow management decisions to make when thinking about repayments. Below we provide some guidance and outline a few key things to consider…

Will my lender contact me to arrange BBL repayments?

Lenders are now starting to contact borrowers who took out a BBL in Spring 2020 to remind them that repayments will soon be due (BBLS repayments are due to start during the 13th month after initial drawdown of the loan, with the earliest date for payments to begin being 1 June 2021). Lenders should be writing to customers approximately three months in advance of the first repayment being due.

A key decision which businesses will need to make is whether to take advantage of the Pay as You Grow (PAYG) options, which allow firms to extend their loan terms, reduce repayments or take loan holidays. Read more in our previous blog here.

The PAYG options are:

Extend the length of the loan from six years to ten years. This option can be extended at any point during the life of the loan, but business owners should remember that they would ultimately be paying more interest over ten years. This is an ‘either or’ option, there is no flexibility for seven or eight year terms for instance.

• Make interest only payments for six months, with the option to use this up to three times throughout the loan. This is another method which can be utilised to extend the term of the loan and reduce the monthly payments. Businesses can opt for three successive six-month periods of interest free payments, ultimately offering an 18-month capital repayment holiday.

• Take a six-month repayment holiday (this option is only available once during the term of the loan).

• Borrowers are able to use these options either individually, or in combination with each other, and there is also the option to fully repay the loan early (there will be no early repayment charges if you choose this option).

If the PAYG option is something which you need to utilise, all of the options detailed above should be automatically available to you upon application. However, it is important that businesses understand the time needed to apply and put this in place. Banks are advising customers to review their options under the scheme as soon as they become available to them, as applications will need to be submitted at least 20 days in advance of the next payment for it to come into effect.

Things to think about when considering your repayment options

If you can afford to stick to the repayment schedule rather than making interest-only payments, extending the loan or taking a payment holiday, you will pay less interest over the life of the loan. Additionally, if it makes sense for you to repay the loan early, which you can do without penalty, this will also reduce interest costs.

However, if you will struggle to meet your loan’s scheduled repayments in full starting from the first month, you should consider carefully which option set out by your lender is best for you and your business. Speak to an adviser who can assist you with cashflow forecasting and help you determine which option would be the most beneficial for you - based on how the business is performing and how affordable the loan is.

If you do choose to take advantage of the PAYG options, there will be no impact to your credit reference rating, however, it may impact future borrowing if serviceability of existing debt is not proven – therefore it is advisable to only use the PAYG options if you need to.

Remember, this is debt and it needs repaying. If you are in a position where you don’t need to take advantage of the PAYG options, keep them in reserve in case your situation changes and start repaying as soon as you can.

This was posted in Bdaily's Members' News section by PM+M Chartered Accountants .