Bounce Back Loans were introduced by the UK government as a means to support companies struggling through the worst of the Coronavirus pandemic. They were implemented as part of the Bounce Back Loan Scheme (BBLS), and although they were intended to provide companies with financial assistance, they were ultimately still a loan. For the vast majority of companies that received a Bounce Back Loan, the time has come to make repayments.
Though repayment is now due, some of the terms aren’t exactly clear for all directors. Payable interest, for example, has caused some confusion for directors looking to start making repayments. In this article, Clarke Bell will cover this aspect, discussing payable interest for Bounce Back Loans, when payments begin, and what you can do if you can’t afford it.
Do borrowers pay interest on a Bounce Back Loan?
A fixed interest rate of 2.5% is applied to every Bounce Back Loan, regardless of other factors involved. However, this rate is not payable until twelve months after the loan was taken out, acting essentially as a payment holiday for recipients. That said, there are options available to directors that can affect how and when this interest is paid, as we will discuss later.
Reducing interest with early repayments
Although repayments are not required until twelve months after you receive a Bounce Back Loan, you may make early repayments if your finances can support it. This is a good idea in the long run; by making small payments throughout the twelve-month repayment holiday, you can reduce the overall amount you owe, thereby reducing the amount of interest payable after the repayment holiday.
Using the Pay As You Grow Scheme to manage interest payments
Despite having favourable terms, Bounce Back Loan repayments are a challenge for many companies. The effects of the Coronavirus pandemic and the lockdown response were much harsher and longer-lasting than anyone expected, making these favourable repayment terms essentially obsolete. In response to this, the government has implemented a second scheme, entitled the Pay As You Grow Scheme (PAYG). This scheme offers three key options that can be used to help companies struggling to pay their Bounce Back Loan. Two of these options have considerable effects on interest payments.
Six-month payment holiday
The first of the two options is to take a six-month payment holiday. This holiday includes both monthly repayments and interest payments, giving your company a full six months without this additional outgoing. Combined with the initial twelve-month payment holiday that begins upon receiving your Bounce Back Loan, you have a total of 18 months without repayments. This option can be taken once during the term of your Bounce Back Loan.
While a valuable tool for the struggling company, this does notably affect payable interest for your Bounce Back Loan. By taking this payment holiday, interest on your loan will continue to accrue, causing the sum you owe to grow over the six-month period. For companies that are suffering acute financial problems, this could be more of a poisoned chalice than anything else, especially if taken before a substantial portion of the loan is paid off.
Also Read: Can You Apply For a Bounce Back Loan Extension?
Interest-only payments for six months
The second option is to make interest-only payments for six months. You’ll pay much less per month, greatly lessening the strain on your company’s cash flow. This option doesn’t have as much of a detrimental effect on the company’s future finances. Interest won’t continue to accrue over these six months, meaning the overall amount owed won’t grow. However, you will still end up paying more in the long run, as you’ll be paying an additional six months of interest that you wouldn’t have otherwise. Moreover, you can use this option up to three times during the term of your Bounce Back Loan.
What to do if you can’t repay your Bounce Back Loan
Even with the PAYG scheme’s aid, some companies still cannot repay their Bounce Back Loan. For directors of companies in this position, it can be unclear what options are available to handle their debt problems. If your company is in such a position, voluntary liquidation is likely to be the best solution.
Using a Creditors’ Voluntary Liquidation to close a company
If your company cannot repay its Bounce Back Loan, even while using the PAYG scheme, it is likely to be considered insolvent. As such, it is important to act quickly to deal with your company’s debt.
For insolvent companies, with or without a Bounce Back Loan, closing through a Creditors’ Voluntary Liquidation (CVL) is often the best option. A CVL is a voluntary insolvency procedure, conferring significant benefits to insolvent companies and their directors. Firstly, you are able to appoint an insolvency practitioner of your choosing to the role of liquidator. This liquidator will essentially take charge of the company, identifying assets, liabilities, and communicating with involved parties. Once everything is tallied up, the liquidator will begin disposing of company assets and emptying accounts, distributing the proceeds amongst creditors in order of priority. The company will then be wound up and removed from the Companies House register, marking its end as a legal entity.
In addition to being an efficient method of liquidating a company, the CVL procedure offers legal benefits to companies and directors. Once the procedure begins, the company is protected from legal action. This insulates the company from creditors looking to force the company into compulsory liquidation through the submission of a winding-up petition. Secondly, any outstanding debts that remain at the end of the procedure will be written off. This includes a Bounce Back Loan, if it was not repaid with the proceeds of the liquidation. As the government guarantees the loan, directors will not be required to pay out of their personal finances…as long as the BBL was used correctly for its intended purpose.
Let Clarke Bell help
If your company cannot repay its Bounce Back Loan, let Clarke Bell be there to help. We have more than 28 years of experience in helping companies find the best solutions to their debt problems, and we can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.