Time to pay the piper: options for businesses struggling with COVID-19 loans

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At the height of COVID-19 restrictions, many small and medium-sized enterprises (SMEs) applied for “soft loans” from banks and government agencies. The various SME lending initiatives were introduced at the end of 2020 with the aim of providing businesses with easy access to emergency funding during the first wave of the pandemic. In Thailand, more than $15 billion in loans were granted at interest rates ranging from 2% to 4% which were absorbed by the Thai government for six months for SMEs. More than a million companies are said to have made use of the initiative.

By the time applications were closed to new borrowers in 2021, the number of businesses that took out COVID-19 loans soared to over two million, meaning there are now over $25 billion loans on favorable terms that must be repaid in the next few years. years as the virus approaches endemic status.

While these concessional loans were a lifeline for many businesses at the height of the pandemic, they have begun to add additional financial burdens as repayments step up yet another monthly expense towards already strained cash flow. . In fact, while many businesses hoped such help would help them survive the pandemic, many found that they had yet to experience a full recovery, if at all. It is feared that more than half of those who have taken out these support loans will not be able to repay them.

Admittedly, repayment of these loans will be difficult given the uneven economic recovery. Nonetheless, it is crucial for struggling businesses to seek help and advice if they are having difficulty meeting repayments before their accounts are classified as non-performing loans. Once loans are reclassified as non-performing, businesses will find it very difficult to secure future financing and may even be subject to increasingly aggressive collection procedures employed by collection agencies and other third parties.

Understanding how COVID-19 loans work

Strategizing how to overcome COVID-19 loan repayment difficulties requires understanding what they entail. At a minimum, directors need to understand whether they themselves have obligations or whether they are personally liable for borrowings if their company is unable to meet agreed repayments. In most cases, loans intended to support SMEs during COVID-19 did not require directors to bear any personal liability; however, it is prudent to ensure this is clear before taking further action.

That said, businesses that are still in dire straits and unable to repay their loans should consider renegotiating the terms of their loans with their creditors to free up needed cash. The possibility of pursuing this option would be more likely if the business is considered viable or with high potential, as it would signal possible recovery and growth in the future. In some cases, it may also be possible to cancel part of the loan depending on the situation of the company.

When renegotiating, one of the options that struggling companies may consider is to extend the repayment terms of their loans, although consideration should be given to the possible financial implications, including personal guarantees and the mortgage of assets. While financial institutions were initially encouraged to take a compassionate stance in the face of the pandemic, the government faces significant pressure to ensure that as much of the funds disbursed to struggling SMEs are recouped as much as possible. This means that banks and other financial institutions may begin to take a tougher stance on those trying to close a business or flee Thailand with outstanding loans, and the legislation may trigger civil and criminal investigations of companies that successfully leave an unpaid balance. .

Businesses also need to think about how they have used their COVID-19 loans given that they were disbursed to help businesses survive the impact of the pandemic. Businesses were generally free to use the loans in any way that would help them survive, whether to pay rent, overhead, or tax obligations. The use of these funds for frivolous purposes, or even to maintain the lifestyle of certain directors or key personnel, can lead to severe penalties.

Of course, these are just general options businesses can take when strategizing to repay their COVID-19 loans. However, the solutions will ultimately depend on the circumstances faced by each struggling business. Therefore, it is prudent to seek expert advice before loans go into default when the options are significantly worse.

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