Chancellor announces ‘pay as you grow’ COVID loans repayment system for UK firms

The announcement means that from today, the 1.4 million UK small businesses that borrowed money from the bounce back loan scheme will be more protected from failure.

The move comes as Sunak remains under pressure from the Labour party and business organisations to increase support for pandemic-hit companies beyond the spring.

Almost £45 billion has been borrowed by small companies under the scheme, which offers cheap state-backed bank loans of up to £50,000. 

Senior bankers are concerned that many will struggle to repay the money as they emerge from the pandemic in a significantly weakened financial condition and with only a slow return of their customers. 

Officials have drawn up plans under the “pay as you grow” structure first outlined by Sunak last September to help ease debt repayments.

While borrowers benefitted from interest-free loans for the first year, they are due to start repaying in May — at which point the pandemic is still expected to be restraining the economic recovery.

The repayment system will allow businesses to extend the length of their bounce back loans from six to 10 years, reducing monthly repayments. 

Under the announcement, struggling businesses will also be able to choose interest-only repayments or payment holidays for up to six months, The Financial Times reports.

According to officials and banking executives, banks will begin contacting their customers about the new scheme from today.

However, the extension to 10 years will also raise the prospect that more businesses will labour under pandemic-related debts for longer.

Bankers have warned that the UK could be left with thousands of so-called “zombie companies” that are able to survive but lack the resources to invest or grow given the need to pay interest on pandemic loans.

From April, both the bounce back and other state-backed loans to large companies will be closed to new applicants. The Treasury is also set to end the furlough scheme under which the state pays millions of people’s wages.

Sunak is also considering extending the package of business support to the summer given the likelihood of a continued lengthy period of coronavirus restrictions.

One option under consideration is replacing the furlough with another incentive for firms to keep hold of workers — perhaps along the lines of the £1,000 “job retention bonus” that the chancellor temporarily brought in last year.