The UK Government have recently announced that businesses that took out Bounce Back Loans to help with the financial instability brought on by Covid-19 will now have greater flexibility when it comes to paying back their loans.
The new “pay-as-you-grow” initiative from Chancellor Rishi Sunak gives borrowers the option to tailor payments according to their individual circumstances, allowing them to extend the length of their loans from six to ten years (reducing monthly repayments by almost half) and making interest-only payments for 6 months. Businesses can also opt to delay all repayments for a further 6 months, allowing them to choose to make no payments on their loans until 18 months after they originally took them out. The option to pause repayments for up to six months is also available.
These new ‘pay-as-you-grow’ options will be available to the over 1.4 million businesses which took out a total of almost £45 billion collectively through the bounce back loan scheme.
Sunak said “Businesses are continuing to feel the impact of extended disruption from Covid-19, and we’re determined to give them the backing and confidence they need to get through the pandemic.
“That’s why we’re giving Bounce Back Loan borrowers breathing space to get back on their feet, through greater flexibility and time to repay their loans on their terms.”
This announcement from the government has been generally received well by both businesses and lenders, who are hopeful that UKs SMEs will make it out of the Covid storm.
Simon Cureton, CEO of Funding Options, a business finance marketplace said: “We welcome the Chancellor’s decision to give SMEs more breathing space to pay back the state-backed loans, as they navigate the obstacles this pandemic continues to present. Small businesses have shown unfaltering resilience in the face of adversity, persevering against all odds, but have nevertheless had to rely on government support too.
“As the government ramps up vaccinations, the long term focus must be to wean them off these schemes. The reality is that the longer this goes on, the more it will negatively impact on the delivery of a truly competitive lending market for SMEs. This repayment extension on government loans, moving to a pay-as-you-grow model, should help small businesses once a sense of trading normality resumes. At that point, unencumbered by the millstone of imminent debt repayments, they will need to be able to access growth funding as opposed to ‘survival funding’. And they will need an agile and diverse lending market to turn to as they invest once again.
“With an independent Fintech Strategic Review led by Ron Kalifa OBE currently underway and expected to report back to HM Treasury early this year, the government needs a flourishing fintech sector to pull in these data-driven and agile players to facilitate loans quickly, responsibly and effectively. The UK’s vibrant SME lending ecosystem has the data, technology and infrastructure to drive the recovery.”
Despite the perceived resilience of the SME industry, some are still worried that without the proper support in place then many SMEs will still be unable to last the lockdown.
Co-founder and CEO of Funding Xchange, Katrin Herrling further commented, “Extending the repayment period from six years to ten years will have a positive impact on around one in five of the businesses. We still forecast that more than half of the businesses who have used the scheme may be unable to repay. Many are already distressed and the 46% of borrowers who had no prospect of being able to repay anyway will still not be able to repay.”
“The CMA ruling last week against Clydesdale Bank stating that banks offering Bounce Back loans may not insist on businesses running their current accounts with them means that banks will not be able to see who can and cannot afford to repay. This leaves them in the difficult position of not knowing what PAYG (Pay As You Go) capacity businesses who have borrowed from them will actually have.”
Repaying the debt
“It was inevitable that the Government would announce these type of deferral options given that the latest lockdown covered the festive season that for many businesses is traditionally their busiest time of the year,” said John Davies, Executive Chairman Just Cashflow and Chairman of The Association of Alternative Business Finance. “However, businesses will still have to deal with mounting losses, accumulated debt, money owed to HMRC, rent, rates etc.
“Business owners will welcome this news but are still facing the key questions on how to repay all the new debt, what drag will it have on their businesses and where will they get the finance they need to get their businesses growing again. Unfortunately, many will be asking themselves: ‘Do I battle on or simply give up and start again?’
“Good businesses don’t become bad businesses overnight and as they look to rebuild after this crisis non-banks should have a key role to play.
“Another related key concern is that taxpayers are almost inevitably going to be asked to foot the bill for the ineptitude of the banks issuing CBILS and BBLS – allowing fraudsters to take huge advantage.”
Opportunity for Top-up Facilities?
Nick Ogden, founder of ClearBank, said “It is great news that flexible payment terms have been introduced. Last year we were encouraging Rishi and his team to pause on setting repayment structures and I think the approach now being taken shows why.
“One point that we raised was top-up facilities. Surely if a business can start to make some repayments it demonstrates that it has survived the pandemic. Its business is recovering which is demonstrated by its ability to make repayments. Given that, top-up or growth capital opportunities against these loans or a new structure, to help the economy recover even faster, must be on the table?
“If the Government just recycles the loans that are repaid into this scheme, leaving its guarantees in place, it could provide a really solid strategy that could boost the economy, accelerating consumption which in turn generates taxes at current rates to reduce the UK plc debt?”
And Helen Bierton, Chief Banking Officer at Starling Bank added, “We are in support of the pay-as-you-grow Bounce Back Loan Scheme facility which the Government has introduced. Small businesses are the backbone of our economy therefore it is important we make it as easy as possible for them to manage their cash flow, repay their loans on time and stay afloat.”