What is a bounce back loan
A bounce back loan is a loan offered by the Government amid the Coronavirus pandemic, to help small businesses gain access to fast track, ‘emergency’ finance, borrowing between £2,000 and £50,000. The loans are interest free for the first 12 months and then have a 100% Government backed guarantee for lenders. Once the twelve months are up, there is an interest rate of 2.5 per cent per year and repayments can be stretched for up to 6 years.
To protect directors from being made personally liable in any case of default, lenders of such loans are not able to request personal guarantees. The company is liable for any defaults, such as being unable to pay back the loan in the future, therefore protecting the director’s personal finances.
What can I use bounce back loans for?
You may you use the loan to pay staff wages, directors included. It can also be used to help with rents and business rates, any monthly business costs or overheads such as phone and electricity bills. Finally, it can be used to refinance other business debts to lower the interest costs related –
Bounce back loans cannot be used to pay dividends or to pay into a personal savings account to accrue interest. It cannot be used for any purposes other than business related.
Paying back bounce back loans
So ultimately, if you are unable to pay back this emergency loan, it is not too much a problem. The issue arises when you pay back a specific creditor with the loan as this creates a preference which is against the law as set in the Insolvency Act 1986. This will be explored further below.
A point to consider is that if you cannot pay back your loan, though this is okay, it can have future impact. For example, it will remain on your company’s credit report, so future lenders may use this to decide on any future investments.
Making preferential payments with bounce back loans
If a company cannot afford to repay the bounce back loan yet uses the loan itself to repay any other personally guaranteed debts it has, then this can be seen as a preferential payment. Although the Government has temporarily eased wrongful trading regulations in order to help struggling businesses, preferential payment terms still apply. This means that if a user (often a company director) of the bounce back loan, uses the loan to pay off personally guaranteed debts or pay off loans provided by friends and family, it is a breach of his/her duties. A preferential payment can be reversed by the court or a liquidator at a later date.
Bounce back loan declarations
If businesses are unable to pay back their bounce back loan, declarations made at application stages should be considered. Upon applying, business owners are asked to formally declare that COVID-19 is the cause of the negative impact their business is facing and that prior to 2020 the company was financially sound. If this information is found to be false, terms and protections the scheme offers are removed.
What action can you take if you cannot pay it back.
If it is just the bounceback loan that you are having trouble with then there isnt too much to worry about. However if the inability to pay is symptomatic of a deeper problem and other loans and creditors are building up then it may well be necessary to look at options such as time to pay arrangements, loan holidays, or in more severe cases a full restructure of the company via an insolvency mechanism such as a company voluntary arrangement or an administration.
Call one of our expert advisers today if you need any further advice on this emergency loan scheme among the others.