Many firms who took out government-backed Bounce Back Loans (BBL) last year will now be making repayments to the lending bank.
Firms still struggling with the effects of COVID-19 disruption have various options to extend these loans or take repayment holidays. These so-called Pay-as-you-grow options are to:
- Extend the length of the loan from six years to ten, at the same fixed interest rate of 2.5%.
- Make interest-only payments for six months, with the option to use this up to three times throughout the term of the loan.
- Request a six-month repayment holiday once during the term of the loan.
Obviously if you take any action to avail yourself of these options you will increase the overall costs of the loan, but what if the reverse applies and you want to repay the loan sooner rather than later?
Is early repayment a good idea?
Your bank and the government would be very happy to agree to early repayment, of course!
If you have weathered the last two years and now find yourself with surplus cashflow, why not reduce or repay your BBL? While that may seem a good idea, you may want to delay any decision to make additional repayments of this loan as it was granted on very favourable terms – interest rates are fixed at 2.5% and the loan is underwritten by a 100% government-backed guarantee. Economic uncertainty still lingers in many sectors, especially with the threat of higher inflation in 2022. Repaying a BBL may remove an important low-cost, low-risk source of funding from your balance sheet.
Perhaps a more prudent course of action would be to create a nominated deposit account to hold surplus funds which you have ‘earmarked’ to repay the BBL until you are more confident that the good times have returned and the BBL funding can be safely returned to the lender.