The Bounce Back Loan Scheme (BBLS), launched last year to help support businesses adversely affected by the Covid-19 lockdown period, finally closed to new applications and top-up requests on March 31st.
Designed to allow SME businesses to quickly access funds, they allowed borrowers to obtain between £2,000 and up to 25% of their annual turnover capped at a maximum of £50,000.
These figures also include BBLS loans which have subsequently been “topped-up” up to a maximum of £50,000. An additional 101,666 of these top-ups had been approved by lenders worth approx. £0.91 billion of the total.
Never before have such generous commercial loan terms been available. Borrowers applied for the loan through accredited lenders, many of whom temporarily lowered their own lending criteria because the loan risk was 100% guaranteed by the government.
This meant that the loan could be given on an unsecured basis without the need for additional security over property or assets, debentures or personal guarantees from company directors.
The Bounce Back Loan was interest and fee free for the first 12 months with the interest rate capped at 2.5% annually afterwards. The initial length of the BBLS is six years but can be repaid early without penalty.
Borrowers also had the option to extend the repayment term to ten years; pause repayments once for a period of six months or move to an interest-only repayment period of six months on no more than three occasions throughout the life of the loan.
As the scheme has now closed to new entrants and the first repayments are coming due, we look at what this means for businesses still in financial difficulties that won’t be able to make the repayments as agreed or planned.
We’ve looked at repayment projections from various official data sources all of which argue that a significant portion of the BBLS lent out will ultimately not be repaid and will have to be written off.
The first is the Office of Budget Responsibility’s Fiscal Sustainability Report which estimates that some 40% of all BBLS borrowers would default on their loan agreements.
The second is from the BEIS - the Department for Business, Energy and Industrial Strategy - annual report which projects estimated BBLS defaults would be in the range of 35-60%.
More data is taken from the Covid-19 cost tracker from the National Audit Office (NAO).
This latest estimate predicts that up to £5 billion will ultimately be written off collectively across the three main loan schemes including BBLS.
Using these predictions as benchmarks, we envisaged three different scenarios that could play out.
These are for a best case (with a 15% BBLS default rate); a median case (40% default rate) and a worst case scenario (60% default rate).
The results are striking:
Original Source: HM Treasury coronavirus (COVID-19) business loan scheme statistics, accessed 25 March 2021.
To better illustrate the size of the sums estimated to be written off, we compared them to the most expensive building ever built in the UK - the new Wembley Stadium.
Adjusted for inflation it cost a modern equivalent of £1.2 billion to build.
The number in the final column shows how many Wembleys could be built for the money that is expected to be written off.
Even in the best case scenario, nearly a quarter of a million loans aren’t going to be repaid. This is a loss of £6.9 billion to the UK Treasury or the equivalent of six Wembleys.
In the median case, this rises to £18.6 billion and over half a million loans defaulted on which sees the number of theoretical stadiums bought rise to 16.
If the worst case scenario came to pass, then close to a million loans would be defaulted which would see £27.9 billion not be repaid - or the price of building Wembley again 23 more times.
Chris Horner, Insolvency Director with Business Rescue Expert, said: “The figures illustrate not only the size of the support measures that were available to businesses to borrow during the pandemic lockdown but also the potential cost if they can’t be repaid.
“In the first quarter of this year alone, over 42% of the liquidation cases we’ve handled had taken out a BBLS, and the average amount borrowed averaged £37,500 per company.
“As the first loan payments for the BBLS come due, businesses will have to seriously look at their ability to pay and their calculations might have been affected by not being able to reopen earlier than this month at best.
“Businesses that have topped-up their initial BBLS loan will also find out that not only are they unable to defer these payments, but they’ll come out at the same time as their original loan repayments - an unwelcome and expensive surprise.
“The most important thing we can is to remind business owners and directors that there are options available for them.
“If they get professional advice and quickly then they could yet find a way out of a seemingly impossibly tight situation. Ignoring it is only guaranteed to add to their problems.”
We have written extensively about Bounce Back Loans and how businesses in financial difficulties can navigate their way through the increasingly difficult situations many are finding themselves in - all before many of them can reopen their doors to the public again.
No matter how bad the situation looks initially, most businesses have more options than they think, but the only way to know for sure what they are is to get in touch with us to arrange a free initial consultation.
Liquidation is always a valid option but it might not be the most appropriate one straight away - it all depends on various other factors and what the business owners and directors ultimately want to do.
Get some professional advice then choose what decisions have to be made - while they’re still your decisions to make.