Many businessowners applied for the Government’s Bounce Back Loans within days of their launch announcement by Rishi Sunak in May 2020. In fact, the BBC estimated in October 2020 that over £48 billion of taxpayers money was given out in Bounce Back Loans, a figure which may well rise given that top up loans are still available until 31st March 2021.
However not every business that accepted this cash injection, has actually spent the money but now that they are approaching the 12 month anniversary, many business owners are asking themselves “Do I repay the loan?”.
The Facts
The loans, backed by the UK Government, were handed out with very generous terms compared to any other commercial borrowing. The loans (up to £50,000 if turnover supported it), were offered at an interest rate fixed at 2.5% over initially a 6 year repayment term (now up to 10 years), with the Government covering the first 12 months interest.
That 12 month period is going to end in around 4 months for some of the first borrowers, which will trigger the start of repayments and interest or you simply hand the money back.
The question is…….?
But, with the country still in lockdown, no guarantees when restrictions will end, and with some sectors of business not yet feeling the true impact of the pandemic yet (I am thinking here accountancy services and financial services to name just 2), and others knowing that the road ahead is going to be full of obstacles (event planners, the wedding industry, entertainment venues), it is not clear IF the cash injection might be needed at some point further down the line, even if to date it has been unspent.
So, the question many business owners are facing is do they hold onto the cash, even though it is going to start to cost them, or do they hand it back at no outlay to their business.
Here are my thoughts……
1. If you have not needed it so far, and you can be certain you won’t need it – give it back. There is no point your business having debt even at such a low rate of interest if you don’t need the money. If you have used some of the money, remember that you can give back any unused loan, so you are only paying for that which you actually used.
2. If you know, or suspect, that you might need financial support further down the line you might consider holding on to the loan and begin the repayments. The interest on a £50,000 loan is £104.16 per month so that is what it is costing you to have the money in the bank. Of course, you would have to make capital repayments too but it does mean the money is there if you need it. It could cost you more, require personal guarantees and be less likely to be approved if you had to apply for commercial finance in 12 or 18 months. You might feel it is better to pay whatever it costs to service the loan for 12 months, for example, if you know you are likely to use it in the end.
3. Spend it! You might be feeling very positive about the post-pandemic landscape for your business – and believe me many people are – so this might be the time to invest in your business using very cheap borrowings which could in turn mean more income to repay the loan. This I believe was one of the intentions of Mr Sunak’s – for businesses in the UK to come out fighting. So, have you been considering an extension to premises? A couple of extra vans? A new machine? Or piece of software which will increase turnover and profits. Now might be the time to do it.
4. Invest it. There isn’t much in the way of interest around right now, but your company might consider investing. Despite the pandemic there are geographical regions and sectors of industry that have performed pretty well over the last 12 months, and although past performance is not a guarantee to the future, may well continue to do so. Pharmaceuticals and technology are 2 examples which seem obvious candidates. You could invest some or all of your loan money, to provide enough return to cover the interest (and the products charges of the investment) and hang on to the loan money in case it is needed in the future. Although you will have made repayments of the capital it will not have cost you anything to have had the money there. If you make more than the 2.5% annual interest (and roughly 1.5% charges), you are in profit. By the way, you need 12% pa return on a £50,000 investment to cover the interest AND the capital repayments.
There is no one answer which I think works for everyone – like our businesses, there are a variety of differences even for those in the same sector – but know this, these loans are probably the best commercial borrowings any of us have ever had so think carefully about the long term before you hand it back. The pandemic is far from over, and for some businesses, you might not even know the long term effects, so think just as carefully before you spend it.