"The COVID Loan Trap: Are You Stuck? Find Out How to Escape"
Updated: Sep 24, 2024
(September 2024)
Breaking Free from COVID Loan Debt
The COVID-19 pandemic forced governments to step in and help businesses. In the UK, this meant offering loans like the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Bank Loan Scheme (BBLS). These loans were crucial at the time, but now we're seeing the long-term effects. It's estimated* that around 1.5 million UK businesses borrowed a total of £72.68 billion through these schemes, with 90% of that going to small and medium-sized businesses (SMEs). To put that into some context the annual defence budget for the U.K. is around £50 billion. Recent reports show that a significant number of SMEs are struggling to make their loan payments.
1. Policy Responses to COVID-19 - International Monetary Fund (IMF) www.imf.org
The Weight of COVID Loans
We recently worked with a local engineering recruitment company (we'll call them ABC Ltd). In 2022, they were still recovering from the pandemic and took out a £200,000 loan under CBILS. This loan helped them stay afloat, but the repayment terms made it hard to grow.
With two years left on the loan and £100,000 still to pay, their monthly payments of £4,027 were putting a strain on their cash flow. This meant they couldn't invest in marketing or hire more people.
These COVID loans, meant to be a lifeline, are now holding back many businesses:
More Debt: Many businesses took on these loans without a clear financial plan, leading to a lot of debt that's stopping them from growing.
High Interest: Even though the government initially offered interest-free periods, interest rates have now gone up, making things even tougher for businesses.
Lack of Flexibility: The strict repayment terms of BBLs make it hard for businesses to adjust if things change in the market. A downturn could mean they can't make payments and might even go out of business.
Less Investment: With more debt and less cash on hand, businesses are cutting back on important investments like new equipment, marketing, and hiring.
Finding a Way Out
Businesses struggling with bounce back loans can now access a "pay-as-you-grow"* scheme. This gives them more flexibility, like being able to pause payments or extend the loan term up to 10 years.
Around 34% of businesses with these loans have taken up these options. Unfortunately, there's no similar scheme for CBILs – any changes to those loans are up to the bank.
1. Pay as you Grow - NatWestwww.natwest.com
ABC Ltd. realized the loan was hurting their finances, so they looked into refinancing. With our help, they were able to extend the loan term to 72 months (6 years), which lowered their monthly payments to £2,027. This freed up cash they could put back into the business.
Refinancing made a big difference for ABC Ltd. By lowering their monthly payments, they were able to:
Improve cash flow: They had more breathing room each month
Invest in growth: They could now put money into marketing to attract more customers.
Plan for the future: With better finances and more customers, they're in a stronger position for long-term growth.
There are several ways businesses can deal with these COVID loans and start growing again:
Refinance: Look into refinancing for lower interest rates and more flexible terms.
Consolidate debt: Combine multiple loans* into one with a lower interest rate to make repayments simpler and cheaper.
Get professional advice: Talk to financial experts for help managing debt and planning for growth
Focus on cash flow: Make sure you have good cash flow management practices in place.
1. Debt Consolidation Loans | Loans to Pay Off Debt - MoneySuperMarketwww.moneysupermarket.com
Just like ABC Ltd., businesses can overcome these challenges and achieve sustainable growth by understanding the impact of these loans and taking action. The government doesn't want to see businesses fail just because of short-term cash flow problems. They've told lenders to be understanding and flexible with borrowers who are struggling.
If you're an SME with outstanding CBIL or BBL finance, get in touch with us today to discuss your options.
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