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

During the height of COVID-19 restrictions, many small and medium-sized enterprises (SMEs) applied for “soft loans” from both banks and government agencies alike. The various SME loan initiatives were introduced in late 2020 with the aim of providing businesses with easy access to emergency funding during the first wave of the pandemic. In Thailand, over USD 15 billion in loans were handed out at interest rates varying from 2% to 4% which were absorbed by the Thai government for six months for SMEs. Over a million companies are said to have made use the initiative.

By the time applications were closed to new borrowers in 2021, the number of companies that took out COVID-19 loans ballooned to over two million, meaning there are now over USD 25 billion worth of soft loans which need to be paid off in the coming years as the virus approaches endemic status.

While these soft loans were a lifeline for many businesses at the height of the pandemic, they have started mounting additional financial burdens as repayments intensify yet another monthly outgoing to already stretched cash flows. In fact, while many businesses have hoped that such assistance would help them survive the pandemic, many have found that they have yet to experience full recovery, if at all. There are fears that more than half of those who took out these support loans will be unable to repay them.

Admittedly, repaying these loans will be difficult given the uneven economic recovery. Nonetheless, it is crucial for struggling businesses to seek help and advice if they experience difficulties keeping up with repayments before their accounts are classified as non-performing loans. Once loans have been reclassified as non-performing, businesses will find it very difficult to secure future financing and may even risk being put through increasingly aggressive collection procedures employed by collection agencies and other third parties.

Understanding how the COVID-19 loans work

Strategizing how one can overcome difficulties repaying COVID-19 loans requires an understanding of what they entail. As a minimum, directors need to understand whether they themselves have any obligations or are personally liable for the loans if their company is unable to meet the agreed repayments. In most cases, loans for supporting SMEs during COVID-19 did not require directors to take on any personal liability; however, it is prudent to ensure that this is clear before taking further action.

Having said this, businesses that still find themselves in a distressed state and unable to repay their loans should consider renegotiating the terms of their loans with their creditors to free up necessary cash flow. The possibility of pursuing this option would be more likely if the business is considered viable or high potential as it would signal eventual recovery and growth in the future. In some cases, it may also be possible to write off a portion of the loan depending on the circumstances of the company.

When renegotiating, one of the options that distressed companies may consider is extending the repayment terms of their loans, though certain thought must be taken with regard to possible financial implications, including personal guarantees and mortgaging of assets. While financial institutions were initially encouraged to take a compassionate stance amid the pandemic, the government is facing significant pressure to ensure as much of the funds disbursed to distressed SMEs are recovered as possible. This means it is possible that banks and other financial institutions will begin taking a harder stance on those who attempt to close a company or flee Thailand with outstanding loans, and legislation can trigger civil and criminal investigations into companies that successfully manage to leave an unpaid balance.

Companies should also consider how they used their COVID-19 loans given that they were disbursed to help businesses survive the impact of the pandemic. Companies were generally given freedom to use the loans in whatever way would help their company survive, whether it was paying rent, overheads, or their tax obligations. Using these funds on frivolity, or even to maintain the lifestyles of certain directors or key personnel, may incur severe penalties.

Of course, these are simply general options companies can take when strategizing how to repay their COVID-19 loans. However, solutions will ultimately be contingent on the circumstances faced by each individual company in distress. Therefore, it is prudent to seek expert advice before loans go into default where options are significantly worse.

Is your company struggling to repay loans taken out during the height of COVID-19? Contact us at [email protected] or via the contact form provided to explore the options available to you. 

You can find out more about our restructuring and insolvency practice here.