During the worst of the pandemic, many businesses took additional borrowing by way of a Bounce Back Loan (BBL) to protect them against a shortage of cash.
These loans were designed as a way of allowing businesses to access loans which they might not ordinarily have been able to secure. The process and speed of the loans were simplified to provide a straightforward and quick way for businesses to approach their bankers and get cash into their account. This enabled them to continue trading when there may have been a sudden and unexpected downturn.
BBL were available until March 2021 and provided loans of up to £50,000. They were interest-free for the first 12 months and without any capital repayment during this period. The loans were originally to be repaid over six years.
Many businesses will now be in a position where repayments are due to start and may have already been contacted by the lender explaining the options available to them. One option is to simply repay the whole of the loan in a single payment without any interest cost. Although this might be an option for some businesses who have recovered since the loan was taken, there will be many others who will wish to repay by instalments.
Recent changes mean that the repayment period can be extended from six to 10 years. This will increase the interest cost of the loan but might give the business some extra breathing space if cash remains tight. There are also options to make interest-only payments for six months, an option that can be used three times during the loan, or pause payments for six months. This second option can only be used once and both options will increase the interest payable on the loan.
Like any form of borrowing the business will need to look at what is best for them, in terms of repayment and interest cost.
As businesses recover, they may also consider looking at the Recovery Loan Scheme which is designed to help businesses who are financially viable, if it were not for the impact of the pandemic, and that have been adversely impacted by the pandemic. These loans, starting at £25,000 to be repaid over a maximum of six years, are being offered by several lenders including some high street banks. The loan will see the Government give an 80% guarantee to the lender and no personal guarantees will be required for loans of up to £250,000. As with any borrowing, the business will want to make sure the repayments are affordable.
For businesses who find it difficult to meet VAT and other tax payments, HM Revenue & Customs (HMRC) continue to offer Time to Pay arrangements. This allows businesses to agree regular instalment payments to spread the payment of tax across a longer period than the regular payment dates. Each arrangement must be formally agreed with HMRC and will be based on many factors, including the amount outstanding and the cash available to the business.
As with any form of borrowing, a key to deciding what is best for the business is having up to date cash flow forecasts to demonstrate that the repayment is affordable. Businesses will have seen many changes during 2020 and 2021 and therefore a forecast which can be flexed as circumstances change is vital to keeping control of business costs and outgoings.
If a business gets to a position where it can’t pay its liabilities, including loans or Time to Pay arrangements, it is essential that the correct professional advice is taken at the earliest opportunity.
As the economy continues to recover from the effects of the pandemic, businesses will need to reassess their financial position and commitments so they will be in the best position going forward.