When a large percentage of the Bounce Back Loans default or remain unpaid beyond its payment period, the banks have the responsibility to pursue payment from delinquent borrowers.
However, taking the impossibility of economic recovery due to the COVID-19 crisis as an example, banking experts in the United Kingdom are warning that up to half of the 600,000 borrowers of Bounce Back Loans may likely remain unpaid, result to the collapse of hundreds of small businesses, and also lead to a struggling banking system.
This is because banks were checking and going after delinquent borrowers become logistically impossible during a crisis, especially when they have to pursue thousands of small and family-run businesses in courts. Some of these debts may just have to be written off or converted to something else.
To solve this problem, banks may have to take loans off their books in exchange for commitments to continue lending in order to sustain a recovery. From the very start, they also have to be clear about the terms of Bounce Back Loans, stating that these loans are not grants and lenders may still approve or disapprove the loans.
What are Bounce Back Loans?
Bounce Back Loans, as the name suggests, were designed to help Britain’s small and mid-sized enterprises, micro-businesses, and other businesses that require smaller loans as they “bounce back” once the trade is permitted to resume.
The length of Bounce Back Loans is at 12 months free of interest, with an interest rate of 2.5% per annum fixed up to six years. Minimum loan for this scheme is at £2,000, and the maximum loan is up to 25% of the business’s turnover and £50,000.
In order to be eligible for Bounce Back Loans, the business must be a UK limited company or partnership, or tax resident in the UK and has been impacted by the COVID-19 pandemic. The business must also self-declare that they were not in difficulty on December 31, 2019, and that the loan will be spent for the business’s economic benefit and not for personal purposes.
On the other hand, businesses that are not eligible for Bounce Back Loans include credit institutions, insurance companies, public sector organisations, and state-funded primary and secondary schools.
In order to lower the risk for lenders, the government provides security for 100% of the Bounce Back Loan amount.
What is Loan Default?
Loan default happens when a borrower fails to pay back their debt according to the loan’s initial arrangement. This means that successive payments have been missed in the course of weeks or months. However, lenders provide a grace period before penalising the borrower after missing a payment due date.
This period between missing a loan payment and having the loan default is called the delinquency period. During the delinquency period, debtors will have time to contact their lenders to make up for the missed payments.
Bounce Back Loans is a scheme designed for Britain’s smaller businesses that need smaller loans in order to “bounce back” their businesses affected by the COVID-19 pandemic once the government permits trade to resume. Like other types of loans, this loan scheme has payment terms that a debtor has to meet responsibly and on time. Otherwise, the debtor will be considered a delinquent borrower and may result in loan default.
If you want to learn more about the discussion of what happens if a percentage of bounce back loans defaults, you can get in touch with Annette & Co. for FREE business advice. Better yet, you can tune in to my Podcast.
For more information about this matter, be sure to check out Episode 143.