Is your business struggling to pay back Covid loans? Here's what to do

A third of small companies fear they may struggle to return state aid. Here's what to do if you're finding it hard.

Man in a suit with his head in the sand
Do not, under any circumstances, bury your head in the sand
(Image credit: © Getty Images)

One in three small businesses are worried that they will not be able to repay emergency Covid-19 loans. A survey by the consultancy EY of hundreds of small and medium-sized enterprises warns that with pandemic support for businesses now largely over, many firms have not recovered sufficiently to begin making repayments.

Default rates on Bounce Back loans and the Coronavirus Business Interruption Loan Scheme (CBILS), under which banks offered billions of pounds in government-guaranteed loans to stricken businesses, have so far been lower than expected.

However, business advisers point out that until recently support from government, such as the furloughing scheme, has continued to alleviate firms’ financial worries. Now, however, these programmes have been withdrawn, with many banks also beginning to wind down emergency-assistance schemes.

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Consider an extension

For firms facing repayment problems, the position varies according to the type of support they received. Bounce Back loans do at least offer a variety of forbearance options. You can extend the term of your loan from six to ten years, which will reduce the monthly repayment due.

It is also possible to shift to making interest-only payments for six months, and to do so three times within the term of the loan. And once you’ve made six monthly repayments, you can ask for a six-month repayment holiday on your loan.

By contrast, CBILS offers no automatic forbearance options. If your business anticipates being unable to make repayments, you will need to discuss your situation with the bank that made the loan as soon as possible.

Lenders may be prepared to offer the kind of support available under the Bounce Back loan scheme, but this is at their discretion and will depend on their assessment of the long-term viability of your business. One possibility could be to take advantage of the Recovery Loan Scheme (RLS), the government-backed scheme that replaced Bounce Back loans and CBILS at the end of March. The scheme offers loans of up to £10m and the money can be used to refinance existing debt.

However, while most businesses are, in theory, eligible for the RLS, banks are required to assess whether your borrowing plans are viable. If you want to use the RLS simply to buy your business time, your application may be rejected.

Bear in mind too that the terms of the RLS are less attractive than those of the schemes it replaced. Interest rates are higher and repayments begin straight away, which is awkward for businesses that are struggling.

In which case, it is important that businesses explore all their options for funding. Don’t assume your bank is the only possible source of help. For example, alternative finance providers offering invoice finance, asset finance, or other specialist types of borrowing could be an option for some firms. It might even be possible to raise funding by selling a chunk of equity in the business.

What business owners must not do, under any circumstances, is bury their heads in the sand. The earlier you engage with lenders, the more likely it is that you will receive a sympathetic hearing – all the more so if you can set out a credible plan for getting on top of the firm’s finances as pandemic-related disruption begins to ease.

If necessary, take professional advice from a restructuring expert. They may be able to help you pick a path through the company’s problems – and help you work with your lenders to get you past the immediate

David Prosser
Business Columnist

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.