The Bounce Back Loan Scheme was introduced by the Chancellor of the Exchequer in 2020 as a way of helping small to medium businesses struggling due to the coronavirus pandemic.
As part of the scheme, businesses could borrow between £2,000 and up to 25% of their turnover, up to a maximum of £50,000.
Changes to the scheme have now been introduced, first announced by Chancellor Rishi Sunak last September, that give any businesses that took out the government-backed loan greater flexibility to repay the loans.
In this guide, Clarke Bell looks at the changes to the Pay As You Grow repayments for Bounce Back Loans, and what this will mean for your business.
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What is the Bounce Back Loan Scheme?
The Bounce Back Loan Scheme was initiated by the government to help small to medium businesses that were originally excluded from the Coronavirus Business Interruption Scheme. It is designed to offer a quick cash injection to struggling businesses and keep them afloat during the pandemic.
If you haven’t yet applied but your business has been struggling, then you had until 31st March 2021 to apply.
Changes now rolled out to the Pay as You Grow scheme have been designed to allow for more flexible repayments on Bounce Back Loans over fears that businesses will struggle to repay the money owed as the first repayments on the loans were due to begin in May 2021.
Next, we will look at the impact of these changes on businesses.
Pay As You Grow repayments for Bounce Back Loans: What’s changed?
Opportunity to delay repayments
The Chancellor has now allowed businesses to delay repayments by a further 6 months. This means that businesses will now have 18 months before they need to start paying off the loan.
However, it is worth noting that interest will still kick in from 12 months. So this is an option that should be taken only by those who are struggling financially, as the earlier you start paying off the loan, the less interest you will need to pay.
The rate of interest you will be charged is fixed at 2.5% which is far cheaper than a typical personal loan.
Your lender will get in touch with you about repayments three months before they are due to begin, meaning this will be a good opportunity to discuss your options if you think you will need to delay payments.
Extending the maximum length of the loan
Businesses will also have the opportunity to extend the length of the loan from 6 years to 10 years at the same interest rates. That means one year interest-free and then the rest at 2.5%.
The government has said that by extending the repayment period to 10 years they hope to cut monthly repayments by almost half.
Although you will end up paying more in interest, you can repay the loan at any time without paying a fee. This gives businesses a great degree of flexibility.
Making interest only payments
The government has also announced that businesses can make interest-only payments for 6 months, which they can do up to three times throughout the period.
For many businesses that have been struggling in the past year due to the pandemic, this will be welcome news. However, for some it will be too late. For insolvent businesses, it’s time to know what your options are.
What options are there for insolvent companies?
If your company is insolvent, meaning it can no longer cover its daily costs or repay its debts, then it’s time to consider your options.
The first option is liquidation.
This is a route most suitable for companies that have little chance of business turnaround and do not believe they have a sustainable future in front of them.
If this is the case, Creditors’ Voluntary Liquidation (CVL) might be the best route forward.
This is a formal insolvency process carried out by a licensed Insolvency Practitioner who liquidates a company, stopping it from trading and operating. This is a completely voluntary process, as the name suggests, that is initiated by the company directors and shareholders.
This is usually the best option for companies that are no longer viable and are operating at a loss. If this is the case, it is better for them to act and enter into a CVL before they are forced into liquidation.
This is opposed to Compulsory Liquidation, in which a company is forced to stop trading by creditors who issue a winding-up petition to the court if a company owes them £750 or more and their payment demands have gone unfulfilled.
This is the most serious form of liquidation which can have a series of negative impacts on the director.
Company Voluntary Arrangement (CVA)
Another option open to insolvent businesses is to enter into a CVA. Unlike liquidation, through which a company is closed, a CVA aims to turn the business around and restore it to profitability.
A Company Voluntary Arrangement allows an insolvent company to come to an agreement with creditors to repay its debts over a fixed period of time.
Whilst a company is under a CVA, the director remains in control and it can continue to operate and trade.
A CVA is also carried out by an Insolvency Practitioner who will work with the company directors and their accountant. They will draw up a proposal on how the company will pay creditors back and a schedule under which they will do so. This must be agreed by 75% of creditors and 50% of shareholders to progress.
Let Clarke Bell help you
If your company is struggling financially, it’s better to act sooner rather than later to ensure more options remain open to you. If you are unsure of the best route forward, Clarke Bell are here to help you.
Our team of experts have years of experience working with businesses of all kinds to help find the best solution for them.