Treasury pushes to double bounce back loan repayment period to 10 years #SmallBiz - The Entrepreneurial Way with A.I.

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Monday, July 27, 2020

Treasury pushes to double bounce back loan repayment period to 10 years #SmallBiz



Originally written by Timothy Adler on Small Business

The Treasury is pushing for the bounce back loan repayment period to be doubled from five years to 10 years.

Both Government and banks that have jointly lent £33bn through the bounce back scheme are afraid of the looming wave of nonrepayment.

More than a million small companies have borrowed under the bounce back scheme, which offers loans of up to £50,000 and are covered by a 100-per-cent state guarantee.

The loans were launched in May after an outcry about the criteria attached to the coronavirus business interruption loans, which made it difficult for small businesses to qualify.

However, the Office for Budget Responsibility estimates that £53bn will eventually be handed to small firms in bounce back loans, with 40 per cent likely to default. This equates to costing the taxpayer £16bn in bad loans.

>See also: Half of small businesses will never repay Bounce Back Loans, warn banks

Bounce back loan repayment

Nearly half of small businesses that have taken out government emergency coronavirus loans do not intend to repay them. Forty-three per cent of businesses that have taken out either bounce back loans or coronavirus business interruption loans said they do not believe the Government will chase the debt, or that they will be unable to repay the loan, according to the Business Banking Resolution Service.

Caroline Stockmann of the Association of Corporate Treasurers told the Telegraph that she supported longer bounce back loan repayment terms and that some of her members had warned of a “very ugly” second half of 2020.

She said: “If large numbers of businesses are struggling and they don’t get any help, the economy is going to go into a worse and worse spiral.”

Ms Stockmann warned that mass defaults could mean banks themselves start to get into trouble.

The Federation of Small Businesses said that the rules of bounce back loans needed to be made more generous to lessen the burden on companies struggling because of the coronavirus pandemic.

At present, the terms include no payments or interest for the first 12 months and the capital to be repaid within six years at a Government-set interest rate of 2.5 per cent.

Samantha Bamert, boss of lender AskIf, said that the Government should allow repayment of state-backed loans to be paused for five years or longer so that companies have space to grow.

And Ravi Anand of lender ThinCats supported a student loan- style system in which repayments would be linked to how the borrowers perform, so that companies in distress do not have to repay what they borrowed.

However, the Treasury has already apparently ruled out converting its debt in SMEs into equity and is afraid as being seen as partial to small businesses that have taken out bounce back loans, giving them an advantage over SMEs which have just soldiered on.

And the banks are pushing back against doubling the loan period to a decade, because that creates more work and risk. Rather, they are waiting to hear from the Government as to what its guarantee actually means if small businesses are unable to repay the loans.

Code of conduct

Meanwhile, banks and Treasury officials are formulating a common code of conduct as to how all bounce-back-loan lenders treat borrowers, especially ones which are having difficulty with — or have no intention of repaying. The banks realise they are onto a hiding to nothing and a potential PR disaster if they are seen to be hounding mom ‘n’ pop businesses for repayment.

On the other hand banks say they would have to hire hundreds of new staff to deal with defaulting loans just at a moment when banks are dealing with squeezed margins and zero interest rates. Most banks are laying people off, not hiring them.

Further reading

HSBC handling of bounce-back loans branded ‘shambles’ by businesses

 

 

Treasury pushes to double bounce back loan repayment period to 10 years


via https://ift.tt/2Jn9P8X by Timothy Adler, Khareem Sudlow