Should I pay back my Bounce Back Loan?

Some thoughts on whether you should rush to pay back your Bounce Back Loan

This is a common question we receive. The scenario is that clients secured a Bounce Back Loan at the height of the first lockdown, having suffered significant losses, but are now in the fortunate position of being able to repay some or all of the balance. As the 12 month anniversary approaches - i.e. start of interest charges - most clients are alive to the additonal costs that are approaching, and the need to start making repayments.

If you have the funds, repaying the loan as far as possible may seem like a sensible solution. But it deserves further thought.

The interest rate for Bounce Back Loans is fixed at 2.5% a year. The repayment term is six years - the first year being interest free (or rather paid by HM Government) and the remaining five years at 2.5%. You'll be able to extend the term to ten years if you need to, enjoy a capital payment holiday of up to six months (up to three times during the loan) and pause your repayments in full for up to six months (once during the loan).

In short, its some of the cheapest and most flexible money available.

In times of crises, cash is king and perfectly viable businesses often fail only for a lack of cash. So, it is a sensible approach to maximise your cash balances as far as possible during times of difficulty. That includes your Bounce Back Loan.

At this point, many clients will suggest that they do not, or cannot, afford the loan repayments. For example, if you borrowed the maximum of £50,000 then your monthly repayments (assuming no further holidays or term extensions) will be in the region of £937.50.

So the natural question is can I afford £937.50. But that isn't necessarily the correct question.

The interest charge for the above scenario will be around £3,177 (i.e. you will pay back £53,177 in total). Interest starts high and ends low as balances are repaid but for a crude comparison, that equates to £635.40 per year on average over five years, or £53 per month.

Repayments are made of two elements - capital and interest. If you use your loan funds to repay your capital, this means you only have to find the interest - around £53 per month.

Going further, in many cases that interest will be a legitimate tax-deductible expense. For those paying Income Tax at 45% as sole traders for example, the tax relief would be around £23.85 - the actual cash cost would be in the region of £29.15 per month.

Of course, in this scenario the amount of funds available to you is diminishing all the while, as you repay your loan. But, as you do, you have a (diminishing) amount of loan capital available. The point is that this capital is available to you in an emergency, and as we have seen above you can negotiate interest or even full repayment holidays with your Bounce Back Loan lender should you need to make use of some or all of those funds.

In times of crises obtaining support can be difficult. As we have seen throughout this pandemic, we have no idea what the future holds. A bird in hand is often a safe approach.

Your individual circumstances will determine the action you should take, and the above is provided as general information on some of your options available. Borrowers should discuss their specific circumstances with an appropriate professional, which may include an FCA regulated firm where appropriate.


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