It’s hard to believe that the UK first went into lockdown over a year ago. The restrictions were unavoidable, but forced closures meant many SMEs needed support to survive. The Chancellor responded by introducing a range of unprecedented measures, including the Bounce Back Loan Scheme (BBLS).
The terms of the BBLS were extremely favourable, offering an interest rate repayment holiday of 12 months followed by five years to repay the loan at a fixed rate of 2.5%. However, with no end to restrictions in sight, the Chancellor reckoned that some SMEs may need a bit of flexibility with their repayments, so in September 2020 he launched the Pay As You Grow (PAYG) scheme. Earlier this year, and to support the roll-out of the initiative, the British Business Bank (BBB) published further details on the PAYG options and how they can be used by borrowers.
Introducing Pay As You Grow
PAYG is designed to support SMEs with a BBLS facility. For those that have already started paying back their loan, it can help to ease the financial burden. For those still enjoying the interest rate repayment holiday, it aims to avoid the burden before it arises.
The scheme allows borrowers to extend their loan term from six to ten years while paying the same interest rate of 2.5%. Within that term, borrowers can switch to interest-only repayments for a period of six months on three occasions or take another repayment holiday of six months, although only once.
To access PAYG, you deal directly with your lender who will advise you about how the different options will affect your repayments. You should receive a notification about the scheme three months before the end of the interest rate repayment holiday. If you were among the earliest borrowers in May 2020, you should have heard from your lender in February.
In the meantime, there are two further details about PAYG worth highlighting. Firstly, it doesn’t alter your liability- you still have to repay your BBLS loan. And secondly, while it won’t affect your credit score, lenders assess applications based on outstanding debt, so the sooner you clear your loan, the easier you’ll find borrowing in the future.
Cheaper sources of funding
Many small businesses will welcome PAYG, but using one or a combination of the options listed above increases the cost of your loan. You’ll end up paying more interest overall if you choose to extend the term to ten years or take advantage of the repayment holidays.
Before committing to PAYG, you might want to consider more affordable ways of securing finance for your SME.
In March’s Budget, the Chancellor introduced several measures to help SMEs recover from lockdown. In the short term, retail outlets and the hospitality sector can apply for up to £6,000 and £18,000 respectively to cover the costs of reopening, while the Help to Grow scheme provides funding for training and discounts for software. Unlike loans, you don’t have to repay grants. Looking further ahead, the Super Deduction scheme allows you to claim tax relief on investments in equipment including office furniture and IT systems.
You can also apply for various ongoing grant schemes which were available before the pandemic. They include funding for companies involved in developing innovative products and services and research and development tax credits.
For more information about how to apply for business grants, contact Swoop today.