Time for small businesses to pay back emergency state aid

Lenders are not allowed to demand personal guarantees on loans of less than £250,000

(Image credit: © Chris Ratcliffe/Bloomberg via Getty Images)

The post-lockdown recovery has been a relief to struggling small businesses, but many now face a new problem. They are being asked to repay funding provided by the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back loans, the government-backed emergency aid packages.

By some estimates, as many as two-thirds of firms may struggle to make these repayments, although official statistics suggest default rates, for now at least, are lower than the most pessimistic predictions.

The state stands behind CBILS and Bounce Back loans, but this protection is for lenders, rather than for businesses. If your firm can’t repay, the government will pick up a large portion of your lender’s losses, but that doesn’t help you. Take action as soon as possible if you see a crunch coming.

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For small businesses that took out Bounce Back loans, one option could be the Pay As You Grow scheme. This is aimed at firms that have begun repaying the loans, but which are struggling to stay on top of the costs. Pay As You Grow enables small businesses to take one repayment holiday of up to six months during the term of the loan, which could buy you time if your trading is only just beginning to recover. You can also reduce your monthly repayments for up to six months by switching to paying interest charges only; businesses can do this three times during the course of their loans. Another option is to extend your loan term from the original six years to ten years, which will reduce the monthly repayments you face, although this will mean paying more overall.

Unfortunately, Pay As You Grow is not available to businesses making repayments under CBILS. If you get into difficulties in this scheme, you will need to talk to your bank about the kind of help it is prepared to offer. Lenders have been asked to take a sympathetic view of viable businesses.

Act quickly

The key for struggling businesses is to engage with lenders early. You are much more likely to be able to reach a satisfactory agreement with creditors if you have time and space to negotiate. And if you can set out a plan for shoring up your business’s finances, particularly as the economy continues to recover, you should receive a fair hearing.

It may also make sense to take professional advice from an independent restructuring specialist. Such an adviser may, for example, be able to help you set up a company voluntary arrangement (CVA): a negotiated repayment schedule with your creditors.

The worst-case scenario is that your business goes into administration – while administrators see if it can be sold – or liquidation, if it is past the point of no return. Again, you will need advice. You can’t use these arrangements to walk away from your debts and you could face legal action if you are seen to have abused the system.

The good news is that it is very unlikely you will be held personally accountable for your firm’s Covid-19 borrowings. Lenders may not demand personal guarantees on loans of less than £250,000, which includes all Bounce Back loans and most CBILS arrangements.

Recovery Loan Scheme flounders

The government’s Recovery Loan Scheme (RLS) is attracting little interest, according to small-business advisers, even though it offers loans of up to £10m to firms attempting to recover from Covid-19. Reports suggest demand is proving limited because its terms aren’t especially generous.

Certainly, the RLS, which replaced the emergency CBILS and Bounce Back loan schemes earlier this year, is a less attractive option than its predecessors. It offers loans of up to £10m, underwritten by the state, but repayments begin straight away, and lenders can charge up to 15% a year.

That compares unfavourably with the CBILS and Bounce Back schemes, where businesses did not have to begin making repayments for a year, and where interest rates were capped at much lower levels.

And while the new scheme can be accessed in different ways – as a term loan, an overdraft, or invoice or asset finance – support for businesses that have existing CBILS or Bounce Back debts may be restricted. Another problem is that fewer lenders have signed up to take part in the RLS than provided finance under the previous schemes.

Nevertheless, if your business needs financial support during the next phase of recovery from Covid-19, it is worth at least investigating how the RLS could help. It may still be a better option than conventional finance, particularly given the government protection for lenders.

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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.