Time for small businesses to pay back emergency state aid
Small companies struggling to repay emergency loans have several options, says David Prosser.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
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.
-
Do you qualify for the Winter Fuel Payment if you live abroad?
The Winter Fuel Payment will be means tested for expats living in Europe, in line with the new rules impacting those in the UK. But a quirk in the system means not all countries are eligible.
By Katie Williams Published
-
What the Employment Rights Bill means for your job
New workplace reforms are set to give employees new rights to benefits and flexible working
By Marc Shoffman Published
-
Will the R&D tax credit change in the Autumn Budget?
Will Labour revise state help designed to foster R&D in the upcoming Autumn Budget?
By David Smith Published
-
How to improve economic output using the supply-side approach
Boosting potential economic output through public investment is crucial, says David C. Stevenson
By David C. Stevenson Published
-
What can small businesses expect from Labour's employment law reforms?
Small businesses could be impacted by Labour’s reforms to employment law which will be unveiled next month – here's how to prepare.
By David Prosser Published
-
Mexico passes controversial judicial reform – will it hurt investors?
What will Mexico's new reform mean for investors and the country's economy?
By Alex Rankine Published
-
Indonesia’s new $30 billion capital city is hit by 'delays'
What is causing the delays in Indonesia’s new capital city and when will it be complete?
By Stuart Watkins Published
-
How SMEs can secure public sector work
When it comes to bidding for public sector work, there are a few things SMEs can get a grip on
By David Prosser Published
-
How to choose a web host
With a web host, your company will have an internet presence
By David Prosser Published
-
Maduro clings to power in Venezuela – can he last?
While Maduro clung to his presidential seat, Venezuela's election protests paint a different picture
By Dr Matthew Partridge Published