The best way forward when struggling to repay a Bounce Back Loan
March 9, 2023
When the government launched its business support loan schemes early in the pandemic, there was widespread praise for the initiative. The speed of roll out, simplicity of the application process, initial repayment holiday and low interest rates were just what embattled businesses needed at a time of massive disruption and huge uncertainty.
The Bounce Back Loan (BBL) scheme aimed at smaller businesses saw an astonishing level of take up. By the time the scheme closed in May 2021, almost a third of all UK businesses (1.56m) had been given loans totalling £47.4m, at an average advance of some £30,352.
Unfortunately for some of the borrowers, the scheme’s name turned out to misleading with the pandemic dragging on and on and many of them finding bouncing back extremely difficult. Then the Ukraine war drove inflation to unexpected highs, provoking a cost of living crisis and a new set of supply chain issues. The subsequent wild gyrations caused by the Mini Budget fiasco just made life even more difficult for businesses.
The appetite for these loans has stretched the balance sheets of many small businesses. Pre-pandemic, such businesses often had no history of significant debt levels because they had little by way of assets to support such borrowings and insufficient cash flow and profits to service them. But our research has confirmed that in sectors such as hospitality, retail and construction the total borrowings of SMEs had risen by between two and three times during the first fifteen months of the pandemic.
Bounce Back Loan performance
The government has been remarkably coy about releasing statistics on payment arrears and defaults. Its most recent figures only outline the situation in July 2022. They showed 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.
One lender told the public accounts committee in Parliament in December 2022 that 34% of the Bounce Back Loans it issued during the pandemic were “not performing” and were 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.
More worrying still was a freedom of information disclosure also reported in December by Construction News that nearly 40,000 construction firms had already defaulted on their BBLs up to the end of October 2022, amounting to 15% of the loans issued to the sector. The additional number in arrears was not reported, but based on the July statistics, it could be two or three times those which have already defaulted bringing the total problem loans to perhaps half of all BBLs in the sector.
You may also be interested in: As CBILS defaults rise, what now for struggling borrowers?
BBLs and insolvency
Another FOI request has produced a startling admission from the government, which disclosed in January that 16,589 of the companies that had filed for insolvency in England, Wales and Scotland in 2022 had taken out a BBL. This equates to 72% of all corporate insolvencies. This toll will surely escalate as we go through 2023.
What next for BBL borrowers?
It is vital to keep on top of the overall creditor and cash flow situation. Problems with repaying a Bounce Back Loan do not spell doom. There are many ways of turning around a struggling company that need not lead to insolvency. This includes creditor negotiations, refinancing, or a restructuring of operations.
There are two common strategies that directors must avoid. The first is carrying on regardless and hoping that something will turn up. The other is robbing Peter to pay Paul by delaying payments to other creditors to free up cash for BBL payments. The latter is especially risky as, in certain circumstances, it can lead to prosecution for wrongful trading and personal liability for at least part of the company’s debts.
The best route forward is to stay close to existing financial advisers to develop a plan of action and, where necessary, calling in independent experts who understand the art of the possible early on to advise and implement specialist aspects of the plan, such as refinancing.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.