Businesses that have used the Coronavirus Business Interruption and Bounce Back Loan schemes may soon see their 12-month payment-free period end soon.
Generally businesses that took out a loan when they were first launched in 2020, will soon be required to make their first repayment under the scheme, with the first batch starting in May 2021. It is important that businesses consider how they will service these loans, as the repayments will impact on cashflow, we have therefore outlined below the current repayment and restructuring options available to borrowers.
Repaying a Bounce Back Loan
With large parts of the economy facing trading restrictions into June 2021, the Government is offering businesses support to repay the Bounce Back Loan via the Pay as you Grow’ (PAYG) initiative.
Under PAYG, businesses have the option to:
- Extend the length of the loan from six years to 10 years
- Make interest-only payments for six months, with the option to use this up to three times during the life of the loan
- Pause repayments entirely for up to six months.
PAYG is available to all borrowers from their first repayment and offers companies the flexibility to tailor their repayment schedule to meet the needs of their business.
Businesses do not have to use the PAYG initiative and can choose to make loan repayments as they see fit.
As with any lending, an increase to the length of the loan will result in a rise in the total amount of interest that will be paid on the funds, therefore, cashflow permitting, it may be beneficial to consider repaying the loan as soon as possible. Bounce Back Loans are not subject to early replacement fees.
Repaying a Coronavirus Business Interruption Loan (CBIL)
After the initial 12-month interest-free period ends, lenders should provide businesses with an outline of their repayment costs, factoring in interest.
Pricing varies amongst lenders, but interest rates beyond the 12-month interest-free period are likely to take into account the existence of a guarantee from the Government.
With a loan facility, it may be necessary to provide regular capital repayments, but lenders may be able to provide payment holidays subject to discussions with them. Businesses who borrow under the CBIL scheme are also not subjected to early repayment charges, should they choose to repay their financing before its term ends.
However, businesses remain 100 per cent responsible for paying the facility back, as well as interest and fees charged by the lender once the initial interest-free 12-month period ends.
When a business took out a CBIL, they agreed to be liable for the repayments, in the same way as any other type of credit agreement.
If a business is not able to pay back the loan, the lender will need to recover the debt from any personal guarantee used for the loan, up to 20 per cent of the loan value. The remainder is then covered by the Government’s 80 per cent guarantee.
For loans of less than £250,000, no personal guarantee was required and, in this case, the loss is covered by the Government up to 80 per cent of the loan value at the time.
Businesses can approach lenders to restructure a loan if they have issues meeting the prescribed repayment plan.
Businesses that need to restructure a loan, will need up to date figures, financial forecasts, profit and loss reports and a balance sheet before approaching their lender to demonstrate the difficulties they face.
Repaying the Recovery Loan Scheme
The new Recovery Loan Scheme will be open from 6 April to 31 December 2021. It will offer businesses loans of between £25,000 – £10 million over a six-year loan period and is backed by an 80 per cent Government guarantee.
Despite Government backing, applications will be subject to full underwriting and affordability checks and unlike the other Government-backed loans there will be no interest-free period.
The information required by each lender to approve a loan varies but they typically require financial accounts for trading periods of between one and three years.
It is not yet known what repayments will be required from businesses via this loan, but it is suspected that this finance may have a higher rate of interest than other Government-backed loans.
If you require help assessing your ability to repay loans or would like assistance with the restructuring of any finance taken out as a result of COVID-19 we can help.
For more information on the various loan schemes and financial support measures download our latest key dates pdf.
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