As repayments from loan schemes fall due, Iain Nairn at Leonard Curtis looks at how owner managers can plot a route through.

Lenders are now starting to contact borrowers who took out funding via the Bounce Back Loan Scheme (BBLS) in the Spring of 2020 to remind them that payments will soon start to fall due. This could be causing a headache for a number of businesses as they try to navigate back to ‘normal’ trading life.

When these loans first became available, the Chancellor announced that they would be repayable on a Pay as You Grow (PAYG) basis, allowing businesses to extend the length of the loan to up to 10 years. He also said that businesses can utilise three periods of interest-only payments, to ease cash flow during less profitable periods, and also introduced an option of a six-month repayment holiday.

Businesses need to be aware of these repayment routes and take full advantage if they need to. Lenders will look to understand why a business might be struggling to repay a loan and where this is the case, are likely to flag up the PAYG scheme and other options available from the Government.

Before entering into discussion regarding the PAYG scheme it is important that business owners understand the financial implications of the scheme’s variations.

The additional borrowing through the BBLS may have provided sufficient funding to get the business through the early stages of the pandemic, but has the business got a viable future with the addition of the debt repayment?

A significant number of businesses have also taken advantage of the support of HMRC over the last 12 months. The debt that has been incurred and deferred will also have to be paid back. Business owners need to understand their monthly outgoings and carry out a breakeven review to assess what sales you need to achieve to maintain your repayments. Is this position viable?

Spreading the term of your borrowing will increase the costs associated with it. Interest free periods provide some cash flow breathing space, but interest will continue to accrue during these periods and will increase the level of payments required in the future.

Be careful when thinking about other options. There may be lenders available who could spread the repayment over a greater period, subject to status. However, the BBLS interest is fixed at 2.5% and is unsecured, without personal guarantee. Refinance may be an option, but this is likely to carry more personal risk to owner managers.

Some owner managers might be looking at options of using personal finances to support their businesses. We would always recommend taking advice before doing this. You don’t want to be throwing good money after bad.

Is the business truly viable, especially given all we have been through? Is it prudent to expect that your business will bounce back to the same levels of trade in the short term? The use of these funds now might not be in the best interests of owner managers or the business.

While insolvency legislation has been adjusted to pause ‘wrongful trading’ regulations, directors still need to consider the other areas where personal liability can occur, particularly preferences and transactions at undervalue eg when business assets are sold lower than their true value or for a loss. A hasty decision now could have a significant impact on the future.

At Leonard Curtis, we know that your business is a huge part of your life. Owner managers are inextricably linked to their business and emotion can sometimes cloud judgment. It is important to take this emotion away from the decisions you make.

The Government has provided a great deal of financial support for businesses. As they call back in that financial support, there is plenty of advice around to help plot your business’s own roadmap to recovery. Talk to your accountants and trusted advisors and seek their advice.

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