Concern is growing that after all the warnings about fraud and cash flow issues, the current economic crisis is suddenly starting to push thousands of business borrowers into default on their obligations under the Bounce Back Loan Scheme. Whilst this appears to be a deteriorating situation, there are options available to business owners, especially those dealing with these difficulties early.
The Bounce Back Loan Scheme
The Scheme was launched in May 2020 as a means of getting up to £50,000 cash to businesses struggling with the impact of the pandemic fast and with relatively few questions asked. The government underwrote the risk for lenders and borrowers were able to take out loans without giving any personal guarantees. Interest rates were fixed at a modest 2.5% and an initial one year interest and capital repayment holiday was granted. Over 1.56m businesses took advantage of the Scheme, borrowing a staggering £47.4bn altogether.
Pay As You Grow
When these loans were originally offered, they were a life saver for many businesses faced with closure by unprecedented interruption to normal trading. Who would have predicted that intermittent national or regional lockdown restrictions would still be in place not just throughout 2020 but beyond into 2021? Many borrowers who used the Scheme believed they could repay when normal trading resumed. Yet, it was taking far longer than the government anticipated for trade to get back to pre-pandemic levels. This caused huge difficulties as the initial repayment holiday periods began to run off.
The government recognised the potential problems many enterprises would inevitably face, announcing the introduction of the Pay As You Grow (PAYG) Scheme as part of the Winter Economy Plan in September 2020. This relaxed the terms of the loans, providing for extensions of the initial one year repayment holiday, an extension of the term from six years to as long as ten, and the option of a period of interest-only payments for six months to stop interest accumulating.
What has happened with Bounce Back Loans since?
The availability of up to date information on the Scheme’s performance remains a frustrating obstacle to understanding emerging problems. Even now, company and sector specific data is being withheld and the most recent statistics published by the government on arrears and defaults only cover the situation in July 2022. This analysis shows that loan balances totalling £3.2bn were in arrears and a further £1.4bn had already defaulted. This equates to 10% of the total original loans of £47bn, a far higher percentage than predicted.
Since then, the economy has deteriorated sharply as a myriad of unpredictable factors have pushed the UK into recession and interest rates to increasingly uncomfortable levels. The first hints of what this is doing to the ability of Bounce Back Loan borrowers to cope with the debts are starting to be seen.
One lender reported to the public accounts committee this month that 34.3% of the Bounce Back Loans it issued during the pandemic are “not performing” and are at risk of default. This may be an outlier, but another bank (one of the top four lenders under the Scheme) told the committee that 17% of their loans were in arrears or had defaulted.
This emerging issue will be far reaching, but it is likely to focus on those sectors currently most affected by the economic downturn. A Freedom of Information disclosure reported by Construction News this month showed that nearly 40,000 construction firms had already defaulted on their Bounce Back Loans up to the end of October 2022, amounting to 15% of the loans issued to the sector.
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What options may be available for businesses unable to repay their Bounce Back Loans?
Just because a company is currently unable to repay its Bounce Back Loan, does not mean that all hope is lost. There are many ways of turning around a struggling business, which could include:
- creditor negotiations
- repayment plans
- funding options
- refinancing
- restructuring of business operations
If the company is struggling to repay the loan or has already defaulted, this will usually suggest wider and deeper financial problems that need to be addressed in order to get it back on a solid financial footing. There is a range of both formal and informal restructuring options which can help.
Taking expert advice as soon as possible
Seeking advice from a business rescue and turnaround specialist can open up more options to enable you to get your business back on track.
The potential solution will differ from business to business depending on the circumstances. But what is vital is not to wait for the financial difficulties to overwhelm the company, but to call in restructuring experts at soon as possible.
Unfortunately, for some companies there will be no way forward, but that does not mean that the business, its jobs and its customer and supplier relationships cannot be rescued and steered towards calmer financial waters.
Whatever the situation may be the earlier the rescue is mounted, the better the chances of a positive outcome. Fortune always favours the brave and the proactive in these troubled times.
How we can help
We have extensive experience in advising on debt management, repayment solutions and creditor negotiation and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.