What is a bounce back loan?
The Government backed loans were to help small businesses gain access to fast track, ‘emergency’ finance. Companies could borrow between £2,000 and £50,000. The loans could be used for;
- Staff wages, directors included.
- Rent and business rates,
- Monthly business costs or overheads such as phone and electricity bills.
- Finally, directors could use it to refinance other business debts to lower the interest costs.
The loans were interest free for the first 12 months and then have a 100% Government backed guarantee for lenders. Once the eighteen months are up, there is an interest rate of 2.5 per cent per year and repayments can be stretched for up to 10 years.
To protect directors from being made personally liable in case of default, lenders of such loans were not able to request personal guarantees. The company itself, is liable if it is unable to pay back the loan in the future, therefore protecting the director’s personal finances. So, you will not be personally liable for the loan if you cannot meet the repayments. Always providing the director has “acted reasonably and responsibly”.
Can The Pay As You Grow (PAYG) Bounce Back Loan Help Me?
The PAYG scheme provides three main ways for a company that has taken out a Bounce Back Loan to reduce their monthly payments if they are struggling to find the money to repay what they owe. If you are unable to repay your Bounce Back Loan, the PAYG scheme may be able to assist you:
- The option to postpone repayments for six months. This is in addition to the first-year payment holiday you received when you took out the Bounce Back Loan. To qualify, you do not need to have made any payments on your Bounce Back Loan.
- You can increase the term of the Bounce Back Loan from six to ten years. This allows you to cut your monthly payments in half, which can make a significant difference in your cash flow during this period.
- You can request to make interest-only payments for the next six months. This will reduce your monthly payment for these months while also ensuring you do not pay any additional interest as you would if you took a payment holiday.
What if we know we can’t pay back our bounce back loan?
If you know you are likely to default on your Bounce Back Loan then your company is most certainly insolvent. In this situation then the directors of the company must act in the best interest of the creditors otherwise they risk personal liability.
Our firm advice is this. DO NOT run down the bounce back loan cash until there is nothing left to pay creditors, wages or the cost of liquidation.
We do not expect that to be the case but we do know that may non-viable companies have taken out these loans. So ultimately, if your company is unable to pay back this emergency loan, it is not too much of a problem, if you have acted “reasonably and responsibly as a company director”. Who knew what length of time the Covid-19 crisis would last. If circumstances changed and you act properly there is nothing much to worry about. However, it is likely that if you do not pay back the bounce back loan then your credit rating may be affected at the bank and you are in effect insolvent if you cannot pay your liabilities. Be aware that sole traders could take out loans. In these circumstances the legal entity of the business is the individual so you would be personally liable.
What does not acting “reasonably and responsibly” mean. Well if you used the bounce back loan to repay yourself any loans that you introduced, or pay dividends or drawings when the company cannot pay normal suppliers or creditors, then this is called a preference and is actually against the law set out in the Insolvency Act 1986.
What will happen to me if I cannot pay my Bounce Back Loan?
The PAYG plan gives some businesses more time to pay back their Bounce Back Loan, but it might not be enough for everyone. If a business has several loans and can’t pay them all back, problems can arise. What happens if a business can’t pay back the Bounce Back Loan, and can the owner be blamed for this debt?
One good thing about the Bounce Back Loan is that the government promised banks they’d cover the full loan amount. For businesses, this meant they didn’t need to offer a personal guarantee to get the loan. So, if a business can’t pay back the loan, the bank will ask the government to pay it, not the business owner.
But business owners should remember that the government will only pay if the business becomes insolvent. As long as the business is still running and listed on Companies House, the owner must pay back the Bounce Back Loan.
However, bear in mind that if you borrowed the money as a sole trader, not a limited company, then you are liable for the debt. If you can’t pay it then you will need to enter into a insolvency process such as an IVA or bankruptcy.
Can I Just Dissolve The Company?
No you cannot! The Insolvency Service is to be given powers to investigate directors of companies that have been dissolved as set out in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill. This will close a legal loophole and act as a strong deterrent against the misuse of the dissolution process.
Extension of the power to investigate also includes the relevant sanctions such as disqualification from acting as a company director for up to 15 years. These powers will be exercised by the Insolvency Service on behalf of the Business Secretary.
The measures included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill are retrospective and will enable the Insolvency Service to also tackle Directors who have inappropriately wound-up companies that have benefited from Bounce Back Loans.
The only way to draw a line under the issue is to go through an insolvency process. The bank will only get the money back from the government if the company is liquidated. The bank will either wind up the company through the court or you can instigate the process yourself by using a creditors voluntary liquidation. The latter is the quickest and safest way to close the company.
If you want to liquidate your company quickly and easily then why not visit our liquidatemycompany.com website. You can get a quote in minutes. Liquidations from £3000.
Making “preference” payments with bounce back loans
If a company cannot afford to repay the bounce back loan, yet the directors have previously used the loan to repay any other loans that you have provided, OR loans that you have given personal guarantees for, that is a clear preference under section 239 Insolvency Act 1986. You can be made personally liable for this repayment (in other word asked to PAY IT BACK!) by the liquidator of the company in future, or by a Court.
Although the Government had temporarily eased wrongful trading regulations in order to help struggling businesses, preference law still applies.
Bounce back loan declarations
If businesses are unable to pay back their bounce back loan, then the declarations made at application stage will be reviewed by any insolvency practitioner and your actions carefully considered.
Upon applying, business owners were actually asked to formally declare that COVID-19 was the cause of the negative impact their business was facing and, that prior to 2020 the company, was “financially sound”. If this information is found to be false, then again the director may be made personally liable for the loan, post liquidation.
Will bounce back loans be written off?
The Bounce Back Loan was a loan to the company, not to you as an individual, even if you are director and sole shareholder. Consequently, if the company goes into liquidation or administration then the loan will be written off as well as the company ceasing to exist. However, be aware that if you have used the loan to pay off personal debts or you have made preference payments to your friends than, as advised earlier, this could be reversed by any liquidator and you may be held personally liable. The liquidator may well investigate where it went and conclude that it was “stolen” from the company. The veil of incorporation will be lifted and you will be personally liable for the debts. In addition you may well be disqualified from being a director of a company. So basically it is not worth it. If you are sole trader then the loan is personal to you. As such, it can only be written off in the case of personal bankruptcy.
Might the government write off the loans?
This is an interesting question as it has been reported that up to 40% of companies/individuals will be unable to repay the loan. One idea that has been mooted by the Federation of Small Businesses (FSB) is to grant small businesses a time-limited amnesty under which Bounce Back Loans would be written off in exchange for all-employee equity stakes vested in EOTs – a vehicle defined by Schedule 37 of the 2014 Finance Act. The private lenders writing the Bounce Back lenders would write off and claim their 100 per cent guarantees in these instances.
John Glen who was, at the time, the Minister of State (Treasury) (City), The Economic Secretary to the Treasury on 16 February 2022 said:
There is no government policy to wholesale write off loans. Under the Bounce Back Loan Scheme (BBLS) all loans are liable to recovery action by lenders or – in the case of serious fraud or financial crime – law enforcement.
What action can you take if your company cannot pay the bounce bank loan back?
The Chancellor has extended the flexibility of the loan which will now be available to all from their first repayment, rather than after six repayments have been made. This will mean that businesses can choose to make no payments on their loans until 18 months after they originally took them out.
These Pay as You Grow (PAYG) options will be available to more than 1.4 million businesses which took out a total of nearly £45bn through the Bounce Back Loan Scheme. Businesses first began to receive the loans in May 2020 and the first repayments became due from May 2021 onwards.
However, if the inability to pay the bounce back loan is actually symptomatic of a deeper cashflow problem and other loans or creditors are building up, then it may well be necessary to look at options such as HMRC time to pay arrangements, BBL payment holidays, or in more severe cases a full restructure of the company’s debt and costs via an insolvency mechanism such as a company voluntary arrangement or an administration. If the company is no longer viable it must be placed into voluntary liquidation. You can read all about those mechanisms in our worried directors guide.
If you need a way to deal with personal debts then Debt Management Plans, an IVA, or Bankruptcy are the way forward!
Call one of our expert advisors today if you need any further advice on this emergency loan scheme among the others.
I am worried about not repaying the bounce back loan and I am a company director what should we do if already know our company cannot repay?
Our firm advice is this. DO NOT run down the bounce back loan cash until there is nothing left to pay creditors, wages or the cost of liquidation. This is likely to have personal repercussions.