With the economic recovery still subdued, many UK business owners will be worried their business is still not strong enough to repay its Coronavirus financial support.
Some sectors, such as city centre shops and cafes, are still seeing activity substantially below the levels of 2019. Others have seen an upturn in demand, but are struggling with other problems such as higher raw materials costs, labour shortages, or transport disruption.
In this environment, repayment of government support could be difficult. It may be especially tough for the more than 1.5 million businesses that took Bounce Back Loans, the most popular support. They were given a 12-month interest-free repayment holiday, which means that many now face their first payment. The end of the furlough scheme at the end of September also raises the pressure on cash flow for some.
If you’re concerned about being unable to pay, you will not be alone. The Financial Times reported in August that between 5% and 10% of SMEs had missed Bounce Back Loan payments. Allianz Trade research in September indicated that in the next four years, 17% of UK SMEs are at risk of insolvency.
Alongside Bounce Back Loans, the other main lending support for SMEs was the Coronavirus Business Interruption Loan Scheme (CBILS). Both schemes involved commercial banks distributing funds, with the government as guarantor. However, provisions in the event of non-payment are very different. So, if you are concerned about payment, your next step depends on which scheme you used.
Bounce Back Loans
This was a low-paperwork scheme heavily reliant on self-certification, and £47.4bn was eventually provided, with a maximum loan of £50,000. No personal guarantees were taken, and all firms were offered a 12-month period with no interest and no need for repayments.
If your small business is fundamentally sound, but still suffering from the effects of the pandemic, it can request a move to Pay As You Grow terms. This can include a six-month payment pause, extension of the finance period to ten years (reducing the monthly instalments) and intermittent periods of six months when only interest will be paid.
Announcing the Pay As You Grow terms in February, Chancellor Rishi Sunak said it gives companies “breathing space to get back on their feet, through greater flexibility and time to repay their loans on their terms”.
Coronavirus Business Interruption Loan Scheme(CBILS)
Nearly 110,000 businesses received support totalling £26.4bn under the CBILS scheme, with funding of up to £5m per business, which could be taken as loans, invoice finance, or asset finance. The government told banks that firms receiving less than £250,000 could not require personal guarantees. Those receiving more than this could be asked for a personal guarantee, but recovery was capped at 20% of the outstanding balance and the guarantee could not cover the owner’s family home.
Unfortunately, this scheme does not have a Pay As You Grow option. Barclays, a major provider of CBILS, says on its website: “You’re responsible for repaying 100% of the loan. Where default occurs, we follow our standard commercial recovery procedures (including the realisation of security) before we make a claim against the government's guarantee for any shortfall.”
This underlines an important issue for both types of financing. Although guaranteed by the government, the funds came from banks. As such, missing a payment is potentially as serious as missing any other bank payment — with all the implications for credit at a later stage.
The key question is, is my firm still viable in the long term?
If the answer is yes, look at other options to help with cash flow, so that repayment can get on track. The Inland Revenue’s Time to Pay scheme means tax payments can be delayed, potentially freeing up cash. Check to see if you are eligible for rates relief or the other forms of support still operating. If you’re in Northern Ireland, Scotland or Wales, there may be additional help available, especially for those in the worst-hit sectors.
You should also urgently address the underlying problem that led to the cash flow shortage.
Improving cash flow
Allianz Trade UK & Ireland has a wealth of information on improving cash flow, including:
One option is further borrowing. The Recovery Loan Scheme can offer finance of between £1,000 to £10m (either as a loan, an overdraft, invoice finance or asset finance). It is available to firms who have Bounce Back or CBILS funding which they haven’t yet repaid.
Like the earlier schemes, this is available from commercial finance firms and banks, backed with a government guarantee. However, getting the finance is tougher than the previous schemes: banks will want to see accounts, a business plan, and other documentation. And personal guarantees can be taken for funding over £250,000, although again this cannot be a family home.
If these fixes do not work, professional advice is recommended. Company voluntary arrangements and restructuring plans may offer a hard-pressed business a chance of survival. However, they are complex and potentially expensive processes. Advisors generally say that the earlier advice is sought, the better the chances of success.
Helping borrowers in difficulty
It’s clear that the government doesn’t want finance firms who are recovering Bounce Back or CBILS loans to close down businesses that have short-term cash flow problems, but are otherwise sound.
It has told lenders they must show “due consideration and appropriate forbearance to borrowers in difficulty.”
In addition, The Financial Conduct Authority has given strong guidance for finance firms handling late or missing payments for Bounce Back Loans. These include contacting the firm immediately if a payment is missed and being open to rescheduling payments or a repayment plan.
Companies are also protected by restrictions on winding-up orders put in place at the start of the pandemic. Even though these are being phased out, until March 31, 2022 winding-up orders can only be triggered by a debt over £10,000. In addition, creditors must give firms 21 days to respond before starting the winding-up process.
Taken together, these may provide firms with a little extra breathing space.
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