The Chancellor, Rishi Sunak, announced a series of financial measures in 2020 to help businesses through the coronavirus pandemic. One of those initiatives was the Bounce Back Loan which was launched in April 2020. It allowed small and medium-sized businesses to borrow up to £50,000, depending on turnover, at a very low-interest rate.
As well as being guaranteed by the Government, businesses and organisations didn’t have to start paying back the loan for 12 months. From that point, payments are made over a six-year or extended to a 10-year period if they were still struggling financially.
However, calculating how much your monthly repayments will be has caused some confusion among business owners/directors. Whilst there are no arrangement fees added to the loan figure, and the interest rate charged is low for the duration of the loan, many hadn’t included the Business Interruption Payment (BIP) figure. This is the sum of money paid to the lending parties by the Government to cover the 12 months of interest on the loan. Let’s look more closely at the Bounce Back Loan scheme and how to calculate your monthly repayments accurately.
An overview of the Bounce Back Loan
The Bounce Back loan was a government-backed lending scheme specifically for sole traders, and small and medium-sized businesses to help them through the coronavirus pandemic. The Government worked with several leading financial institutions, including NatWest, Santander, TSB and Barclays, to lend from £2,000 up to 25% of the business’s turnover (a maximum of £50,000).
There were several benefits to the Bounce Back loan:
- Businesses didn’t have to start making repayments for 12 months.
- The Government guaranteed the loan and paid the first year’s interest on the loan to the lending firm.
- It carried a low-interest rate of 2.5%, fixed for the entire period of the loan without penalty.
- It was an unsecured loan, and, as such, businesses did not have to put up any assets to get the loan.
- There are no early repayment charges, so if a company is able, it can pay back the loan in less than six
However, specific criteria had to be met to secure a Bounce Back loan, and the Government takes any misconduct in securing the loan seriously. Such misconduct includes:
- Applying for a company that was insolvent or no longer trading.
- Providing false information on the loan application.
- Using the loan for personal benefit.
- Dissolving the company to avoid paying back the loan.
The types of penalties the owners/directors of the company would incur include:
- The company being wound up (liquidated) by the court.
- Being disqualified as a director for at least five
- A Court Order being served for the owner/director to pay compensation to their creditors.
Paying back Bounce Back loans
In total, over a 2-year period, 1.5 million loans were given to businesses and organisations between April 2020 and March 2021 in the UK. A total of £47 billion was lent to around a quarter of UK businesses. Businesses that started to receive their loans from May 2020 will have started repayments from May 2021.
To date, 4% of the businesses that received a Bounce Back loan have paid in full; just 7% are in arrears, and only 2% have defaulted. However, 21% of companies have taken advantage of the Government’s Pay As You Grown (PAYG) scheme. It was launched in September 2020 and provided a variety of options to ensure greater repayment flexibility.
The PAYG scheme explained
As the pandemic looked to be heading into a second year, the Chancellor launched a new repayment scheme for businesses and organisations that had secured one of the loans from the Government. Known as Pay As You Grow, it allowed companies to structure their repayments more favourably and in line with how their business was growing following the impact of coronavirus.
Borrowers were offered three options by their lenders under the PAYG scheme:
- To apply for an extension of their loan term to 10 years (from 6 years) at the same fixed rate of interest – 2.5%.
- To reduce their monthly repayments for six months by only paying the interest for that period. Borrowers were entitled to this option as many as three times during the term of their Bounce Back loan.
- To opt for a repayment holiday for a maximum of 6 months. This option was only available once to borrowers.
Borrowers were able to select just one option or combine 2 or 3 of the options, depending on their circumstances. However, ultimately, with the repayment holiday or reduced repayment options, borrowers would actually end up paying more interest over a longer period of time.
The scheme was managed by the lender themselves, not the Government, and it didn’t affect the borrower’s credit rating in the future. That said, if borrowers did apply for further lending from their lender, it could impact their creditworthiness assessment.
Bounce Back Loan Calculator
Unfortunately, calculating your repayments on a Bounce Back loan is not as simple as many might have thought. Although there were no arrangement fees to be added to the total loan amount, it wasn’t a straightforward calculation.
The total amount payable included a Business Interruption Payment (BIP) and covered the interest on your loan the Government had paid on your behalf to your lender. Of course, how much the BIP payment depends on the level of the loan being paid back to your lender.
If you’re not sure how much your repayments will be per month, if you haven’t already started paying back your loan, or you want to check that you are paying the correct amount each month, UK Tax Calculators has a very handy Bounce Back Loan Calculator to help you, including a loan extension calculator that will work out your new repayments if you’ve opted for PAYG.
If you are struggling with debt, are considering winding up a solvent company or declaring bankruptcy, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.