Bounce Back Loans – The Background
The UK economy has taken a huge blow over the last year or so from the Coronavirus. The virus has forced thousands of businesses into shutting their doors – some temporarily, some for good.
In order to stop this decay of UK businesses and to offer some form of respite, the UK government announced the Bounce Back Loan Scheme in May of 2020. The scheme is primarily targeted at smaller businesses that have felt the impact of Coronavirus most severely.
The scheme aims to assist businesses to borrow between £2,000 and £50,000 up to 25% of a business’ turnover. The UK government will cover the interest payments for the first twelve months through a Business Interruption Payment (BIP) directly to the lender. This means the original lenders of the loan benefit from a 100% government-backed guarantee of the interest payments being made.
The loans have been set at 2.5% interest rate per annum which is fixed for six years – offering security and certainty at a time when it is so scarce. Once the primary 12 months have ended, borrowers are liable to pay the full remaining loan amount as well as any interest.
The scheme itself is run in partnership with accredited financial institutions with loans delivered through this network. So many businesses have either had to close for extended periods, renovate to meet new criteria, or move into a new area of the market/industry entirely. The new bounce back loan scheme hopes to ease some of the financial pressure that many are facing.
Bounce back loan eligibility
The scheme is open to most businesses regardless of annual turnover who also meet the outlined eligibility criteria. In order to prevent opportunistic borrowers and fraudsters, only businesses established on or before the 1st of March 2020 will qualify to apply.
All applicants must declare at a minimum:
- The business during the time of application must be engaged in active trading or commercial activity. The business must have been carrying out business on or from the 1st of March 2020 and has been negatively affected by Coronavirus.
- The business must not already be in the process of applying for or received a bounce back loan. This includes any wider groups that the business may be a part of. For example, if there is a holding company at the top of the structure.
- The business and wider group they are/may be a part of have not already received loans through the following; Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme, or the Covid Corporate Financing Facility – unless said loan will be refinanced in full by the Bounce Back Loan Scheme facility.
- The business must be a company or limited liability partnership established in the UK, tax resident in the UK, or incorporated in the UK.
- The business cannot be a bank, building society, insurance company, public sector organisation, state-funded primary or secondary school, or an individual other than a sole trader or a partner acting on behalf of a partnership.
- Whether or not the business was, on 31 December 2019, a “business in difficulty” and does not breach State aid restrictions under the Temporary Framework, and if it was a “business in difficulty” then it must confirm it does not breach de minimis State aid restrictions and will not be used to support export-related activities.
- The business cannot be in bankruptcy, liquidation, or any other similar financial situation during the time of their application.
- The business must have more than half of its business income from trading activity. This must hold true for any wider group it is part of. Confirmation is not needed if the borrower is a registered charity or a further education college.
- The business must use the loan fully for economic benefit to the business, not for any personal uses or payments. Full terms and costs associated with loan repayment must be fully understood, and that they must be able to complete timely repayments in the future.
12 months in – repayment time
It is slightly concerning to see how the time has flown by from the first lockdown to now. Without a doubt, the ‘one year anniversary’ of the first lockdown crept up on many.
We are rapidly approaching the one-year anniversary of the scheme being set up. With this milestone comes the handing over of the repayment baton from the government to the borrower.
The original 1-year good grace period was initially intended to correlate with the re-opening of the UK economy, with many predicting preventative Coronavirus policy to be confined to the (recent) history books by this point. But one year down the line the UK is still deep in lockdown. What does this mean for businesses who are expected to begin loan repayments? Will they be left to fend for themselves?
Pay as you Grow
In answer to the earlier question – no.
As we were thrust into another lockdown at the beginning of the year, the UK government realised the original terms of repayment were no longer suitable to the current situation. This led the Chancellor of the Exchequer, Rishi Sunak, to make the following statement.
‘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’
– Rishi Sunak, Chancellor of the Exchequer
This strong statement of intent outlines the basic changes that were made to the scheme earlier in the year, around the 8th of February. The changes are as follows:
- Businesses can now extend the overall length of the loan from six years to ten.
- Businesses can now choose to make interest-only payments for six months at a time, with the option to use this three times throughout the loan period.
- Businesses can now pause repayments entirely for up to six months.
This offers borrowers the chance to tailor their payments to suit their current circumstances. The six-month pause in repayments creates a situation in which businesses can extend their initial one-year good grace period, giving them more time to find their feet and re-open to customers. Together these changes to the terms and conditions of the loan create a more secure and stable environment for businesses to thrive, hopefully stimulating a swift recovery post-Coronavirus.
How much will you need to pay back? Our calculator
It can be difficult to calculate accurately the total cost of any borrowed sum over a period of time – especially if you are running an SME (Small and Medium-sized Enterprise).
The best thing about having such transparent repayment terms is that it has allowed us to create our very own ‘Bounce Back Loan Repayment Calculator’.
If you are struggling to calculate how much you owe, or even if you simply want to save yourself some time – you can find our tool here
Can’t pay your loan? What happens next?
If you are in a situation where you are facing the certainty of not being able to make repayments and have exhausted all support sources at your disposal, then this next section is for you.
The UK government has backed around £45 billion worth of Bounce Back Loans so far. According to the National Audit Office, £26 billion of this will never be paid back.
Although this doesn’t offer much clarity for individuals looking to the future, it may offer some comfort to you that well over half of total loans handed out are not expected to be paid back.
Further to this, the Business Banking Resolution Service (BBRS) has concluded that just over 40% of businesses who have taken out any form of government-guaranteed emergency coronavirus loans have absolutely zero intentions of paying them back. This is either because they do not expect to be able to, or because they do not believe the government will pursue the debt.
Although lenders have recently put a halt to plans to create a separate agency dedicated to chasing down bad Bounce Back Loans, it does not mean that these loans are going to be written off. There has been some chatter regarding the potential value of writing off all emergency loans – especially from ex-chancellor George Osborne. Until an official statement from the government is made, it would not be wise to bet on this happening.
What is for certain though, is that the circumstances surrounding these emergency loans will lead to some concessions. Assets will not be lost as lenders are forbidden from asking for a personal guarantee or to take charge of your home and vehicle. Credit scores won’t be affected either as they aren’t required for the loan scheme.
Banks will likely come after the unpaid money in much the same way they would try and recoup any other unpaid loan. Expect threatening letters, court action, dealing with debt-collection agencies, and potentially even bailiffs.
Google Snippets
What are bounce back loans?
The Bounce Back Loan Scheme was introduced in May 2020. This scheme offers government supported loans to struggling businesses.
How to work out how much I owe for bounce back loan?
We have created an online calculation tool for those looking to calculate their repayments. You can find it here…
Can’t pay bounce back loan what do I do?
The first to do is check out ‘pay as you grow’ – it is likely that some of the recent concessions may apply to you.
I can’t pay bounce back loan what happens next?
It is likely that you are able to access a further 6-month good grace period, where payments will be covered by the government. Try looking up the new adjustments in ‘pay as you grow’.