Now that the Bounce Back Loan Scheme and repayments are due, the Pay as You Grow scheme comes to the rescue. Implemented as a government lending support for businesses during the COVID-19 financial crisis in 2020, BBLS loans and top-up applications have since closed, and lenders are now collecting repayments. Even with the 12-month repayment holiday, many businesses still need help paying. PAYG options prove to be of great help. e.
This article details all about what the bounce back loan was, how it worked, what PAYG means for businesses, loan repayment extension options through PAYG, how to apply for the scheme, and other crucial FAQs.
What Is the Bounce Back Loan Scheme (BBLS)?
The Bounce Back Loan Scheme (BBLS) emerged to provide government refinance support for businesses facing cash flow problems due to the pandemic, which the latter can pay after 12 months (or within) when they are finally able to stand on their feet. It aimed to help businesses that were losing revenue because of the pandemic and could benefit from £50,000 or less in additional funds.
The debt support started in May 2020 and marked its final loan and top-up applications in March 2021. Since then, the total amount borrowed to businesses reached an approximate £45 billion, with a maximum loan amount of £50,000 for each borrower.
BBLS was run by the British Business Bank PLC, a development bank wholly owned by HM Government; hence, it does not necessitate the authorisation or regulation of the Financial Conduct Authority nor the Prudential Regulation Authority. The scheme was further financially backed by the former Secretary of State for Business, Energy & Industrial Strategy.
Loans were available through several accredited lending firms, all of which were given a 100 per cent government-backed guarantee against the outstanding balances (capital and interest) from businesses’ borrowings. This safety net for lenders made the first 12 months of repayment holiday for the borrowers possible as the government paid the interest on their behalf throughout this period via a Business Interruption Payment.
How Bounce Back Loan Worked?
Eligible businesses could borrow from BBLS through accredited lenders starting from £2,000 up to 25 per cent of their annual turnover. They could only get a maximum loan amount of £50,000 and a fixed six-year term for the repayment. However, in the first 12 months, they get a one-year bounce back loan payment holiday where they pay no capital or interest, with the government paying the interest instead on their behalf.
Repayment was expected after this holiday period, which consists of two parts—the capital amount and the fixed 2.5 percent interest rate. The capital amount stays the same every month, whilst the interest depends on the remaining capital balance; hence, interests go down as the business pays per month. The first monthly repayments were the highest, and the succeeding months would vary in amount.
Businesses would receive a letter from their lenders exactly three months before their first payment was due. However, the former could start repaying the loan without having to wait for the holiday period to end, especially when it turned out they did not need the money anymore.
Early Repayment within the 12-Month Holiday
They could either pay in full or overpay throughout the holiday period. In the case of one-off repayment (full repayment), there are no early repayment charges at all. Businesses would not incur interest if they repaid their loans before the repayment holiday timeline ended.
Additional payments on a regular basis (overpayment) come without charges, too. Interest payments will be trimmed overall, and succeeding monthly repayment amounts will remain the same. This allows companies to pay their business loans sooner. However, the catch is that with PAYG in the picture, this payment alternative can easily get complicated (discussed further below).
Whilst some businesses were able to pay their debts in full (during the holiday period) or make overpayments to curb their interests for the next monthly dues, some were still found to be short of revenue for making the repayment even after the one-year repayment holiday concluded.
This is when bounce-back loan extension came into being in the form of the Pay as You Grow Bounce Back Loans scheme. From a six-year term, businesses can now extend their loans up to 10 years if they are eligible. Over time, two more flexible options were added. Read below to find out more about the scheme.
What Is Pay as You Grow Scheme?
Whilst the BBLS loans proved to be helpful for businesses at the height of the pandemic, they are merely just that—loans. In the future, borrowers are expected to pay them off. Despite the government’s 12-month allowance, a lot of companies are facing difficulties with repaying their debts. For millions of businesses, additional support is crucial.
Fearing that a myriad of companies in the UK will go insolvent, the Chancellor of the Exchequer first announced the Pay as You Grow Scheme in September 2020, aimed at mitigating the financial strain amongst businesses that have already started repaying BBLS loans. The Financial Conduct Authority itself mandated the lenders to show proper consideration and forbearance to businesses that find it hard to make repayments.
PAYG will benefit 1.4 million businesses via three flexible repayment options, which can reduce their monthly dues and increase the length of their loans, making them more manageable. Before their first repayment is due (three months before), borrowers can apply for any or a combination of those options.
The Bounce Back Loan Pay as You Grow scheme will not decrease the interest on the loans, but it stands as a significant tool for businesses that may not be able to keep up with their arrears and are at risk of insolvency. They can use a single option or a combination to get their bounce back loan extended, but interest will be added every time, increasing the total amount they owe as they opt for a longer period. To maintain a good credit rating, they should be able to promptly catch up with their arrears.
Bounce Back Loan Repayment Options via PAYG Scheme
To get their businesses back on track, companies have three flexible Pay as You Grow options at their disposal. Once they are three months into their first BBLS loan repayment—have received a letter from their lender and are listed in their online banking’s eligible list—they can apply for any or a combination of the following BBL payment plans:
Extending the Bounce Back Loan Repayment Duration from Six to Ten Years
In cases where companies can only manage smaller repayment sums, they have the option to apply for a 10-year extension of their loan period, which still maintains the fixed interest rate of 2.5%. This would notably mitigate pressure on their cash flow, as the monthly installment burden would decrease by nearly fifty percent. For instance, the monthly repayment on a £35,000 loan may be reduced from £621 to £362.
However, prolonging the loan term by four more years also implies an extension of interest payments for the same duration, as the interest accumulates as well over the extended period. Using the same loan example above, the total £35,000 loan would reach £39,096 unless the business makes an early repayment.
Taking a Full-Repayment Holiday for Six Months
The second alternative is a six-month repayment hiatus (no capital or interest repayments at all), which can only be used once throughout the loan term. This extends the period of payment exemption to 18 months when combined with the preceding 12-month repayment holiday. The drawback is that interest will continue to accumulate during this interval, leading to higher long-term repayments.
Paying Interest-Only for Six
With this option, businesses can opt for a six-month interest-only payment phase, preventing the interest from accumulating. Applying the same loan example above, a £35,000 total loan will have a reduced monthly due from £621 to £73.
Unlike the previous options, this has a relatively lesser impact on the cash flow and offers more flexibility since it can be applied up to three times over the tenure of the Bounce Back Loan. Nevertheless, even though the effect is not as pronounced as the other options, choosing interest-only payments still results in higher overall payments over the extended period.
The six-month full-repayment holiday or the six-month interest-only payment can be used at the same time as the ten-year extension. It is crucial to note that in every option, the total loan amount will increase as the interest accumulates longer.
How to Apply for the Pay as You Grow?
Since the first repayments were due in May 2021 and onwards, Pay as You Grow Santander and other lenders have been reaching out to the borrowers three months before their first due payments to inform them about their PAYG repayment options.
Borrowers have the opportunity to submit applications for various PAYG options, but only one application can be processed at any given time. An interval of two business days applies before they can make an additional request. As lenders directly contact their clients about their options, borrowers should simply wait for a letter from their respective lenders.
Ecommerce businesses or sole traders can apply for PAYG options 30 days before the initial repayment is due through their lenders’ business banking app navigation or by directly visiting their office. To ensure the PAYG option becomes effective in the same application month, they should submit the signed documentation no later than ten days before the payment due date.
Documentation received after this deadline will be processed, and the option will be applied in the following month. Any lender-borrower disputes will be handled by the Financial Ombudsman Service.
FAQs About Pay As You Grow
One of the key advantages of BBLS loans was that the government provided banks with full assurance for the borrowed funds. If a sole trader or a company is unable to repay its loans, even with the assistance of the PAYG program, it is likely facing insolvency. In this situation, swift action is necessary to prevent creditors from taking action and submitting a winding-up petition. In this case, opting for liquidation is probably the best choice.
However, in case the loan cannot be repaid, whether through company liquidation or other means, borrowers will not be held personally accountable for the repayment. The bank will seek reimbursement from the government rather than pursuing company directors for repayment.
Businesses are held liable for their arrears when they did not use the loaned amount for business purposes. Whilst they can use the money to help pay off the company’s existing debts, paying off only some of their creditors and not all whom they owe—such that they pay other lenders but not their tax on self employed income—can lead to problems.
Using PAYG will have no repercussions on the business’ credit score or history, but it could influence how lenders assess their creditworthiness in the future, depending on how well they paid their arrears. For instance, when evaluating requests for additional funding, lenders will consider various factors like income, expenses, and existing debt payments, including obligations under the BBLS. They will also analyse the overall debt exposure, encompassing any outstanding BBLs balances.
For certain companies, extending the repayment timeline of their BBLs serves as a beneficial method to stay on track with their repayment commitments. Given that BBLs were initially introduced with a modest 2.5% interest rate, opting for a longer loan duration offers a financially prudent way to free cash flows instead of using alternative funding means.
However, some businesses may find that obtaining an extension alone might not be enough to restore financial stability. If they have concerns about their ability to meet their loan obligations or manage other borrowed funds, they should actively seek assistance and advice from the experts.
How Legend Financial Can Help
Whilst businesses cannot change the interest rates of their BBLS loans through the Pay as You Grow scheme, there are several ways around the system that allow them to extend the length of their loan and decrease their monthly dues at the same time.
Legend Financial is an expert in this matter. We have assisted a lot of clients facing various business, accounting, and taxation problems, so there are no new challenges we cannot provide solutions to. For BBLS and PAYG expertise, and other business matters, reach us today!
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