Rishi Sunak announced earlier today that the one million plus borrowers of £38bn of bounce back loans could now look to repay their loans over ten years compared to the current six-year term. Borrowers who will start repaying loans next year, following the initial one year repayment holiday, could see their repayments reduce in the short-term by 40%. Combined with other measures to support cash flow, this will be welcome news for business leaders. However, the extension to 10 years provides some indication of the government’s concerns over the time it will take businesses to recover from the current crisis.
Businesses will be able to pay interest-only repayments for up to six months, and businesses in significant difficulty will have the option to apply for repayment holidays for up to six months.
Whilst we have seen many businesses prosper in the short term, a bounce back from lockdown, the longer-term picture remains challenging. The replacement of the Job Retention Scheme with the Job Support Scheme will place more onus on businesses to use their cash to support jobs. This is likely to result in so-called “Zombie jobs” being made redundant and an increase in an unemployment knock-on effect on confidence and spending.
Extending the loan repayment term will be the right thing to do in the short-term for most businesses. The old adage of “cash is king” is certainly true, and whilst extending loans may lead to higher funding costs, this will provide businesses with more options in the short term. In the longer term, these loans could be refinanced with cheaper debt. However, Finance Directors also need to look at the potential impact on other borrowing facilities.
Chand Chudasama and Phil Sharpe are Partners in Price Bailey’s Strategic Corporate Finance team. Chand commented that “Businesses have got to factor in how this debt will impact choices as they move forward, especially if we see CBILS funding benefit from the same flexibility. Being saddled with debt for ten years is a major commitment and the growth plan, route to margin growth and cash generation has never been more important.”
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Phil Sharpe added “Whilst the combined measures provided to support cash flows will help smooth the impact of a downturn, business leaders should not use these as an excuse to shy away from making difficult decisions. We would expect the downturn to last a couple of years, following which there will be a recovery. This is when businesses need cash the most to fund the recovery. By extending the repayment period, Sunak is providing cash for the downturn but also to help fund the recovery.”
Lenders would expect that lower capital repayments should lead to a reduced the level of defaults, however, for many businesses this will be a margin gain and those that do not react to the macro effects of a downturn are still likely to fail.
Chand added “We have seen lenders try and become more positive and active in the market. If their deal is changing, then we have to hope this doesn’t change attitudes toward lending in the coming year or so as there are still many good businesses who want to take on debt to grow and transact.”
For more information on the impact of debt financing on your business, contact Phil Sharpe, Partner in Price Bailey’s Strategic Corporate Finance team using the form below.
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