What is a Bounce Back Loan?
This is a government-backed loan for small businesses, introduced during the difficult trading times through COVID-19 and the numerous related lockdowns. Loans could be 25% of your turnover with the maximum loan being £50k. The loans also and had low-interest rates. The availability to apply for this loan stopped on 31 March 2021.
What is a default?
Defaulting on a loan means missing a scheduled repayment. Your account will therefore fall into arrears. When this occurs, your lender will have a number of options, as outlined in the agreement you signed when taking on the loan.
When companies took out the Bounce Back Loans the total length of the pandemic was underestimated. So, some businesses have struggled for longer than anticipated. In response the terms of repaying the loan were extended to up to 10 years. Remember, the loan may have been Government secured, BUT the responsibility for repayments lies with the company (you will not be personally liable as a director, but your company is as it is own legal entity).
If you think you may default on the loan then the most important thing to do is to communicate with your lender. Inform them about any difficulties you are facing in meeting the payments (before they contact you!). This way, they are aware and may be able to help. If they cannot help then you know you must seek alternate options. However, more often than not, lenders will be fair and considerate if you communicate.
The Office of Budget Responsibility’s Fiscal Sustainability Report 2020 predicted that the number of businesses with Bounce Back Loan defaults could be around 40% – we are unsure how this will play out, but all in all you are not alone!
What options can my lender suggest to help?
Once you have got in touch with your lender – as suggested the first step to take, there are some options that can be explored together.
- Renegotiating the payment plan to help you maintain your account going forward.
- Pay as You Grow Scheme; taking a short payment holiday from the Bounce Back Loan.
- Extending the loan length from the standard 6 years, to 10.
- Switching the loan to an interest-only basis for a short duration.
These options can give breathing space for your business’s trade and cash flow to improve.
What if you are still struggling to pay?
Get in touch with a licensed insolvency practitioner like us at Company Rescue. There may be deeper issues noticed or at least worth reviewing. A default may mean more serious financial problems – even the brink of insolvency!
Speaking with someone experienced in helping others with similar situations can guide you through.
Can I restructure my company with a Bounce Back Loan default?
Of course! A Bounce Back Loan default does not mean that is the end for the company. There are various business help solutions to rescue the company and steer it through financial and operational struggles. This is why speaking to a licensed insolvency practitioner would be of use – they can go through this with you and explore your options and viability.
- Place the company into administration. This will allow you breathing space since a moratorium is put around the company stopping any legal action, whilst you focus on restructuring the company’s finances and operations, to rescue its viable aspects.
- Enter a Company Voluntary Arrangement / CVA. This involves a formal payment plan being agreed upon by the creditors and the company directors. It often lasts for 3-5 years, reducing the payments per month so the company can trade in the meantime, thus being able to have the funds to pay back.
If your company cannot be rescued and has no chance of being able to pay back any of the debt then, winding up the business may be the most suitable option. If you want this process to happen quickly so you can get on with your life then the best option is a Creditors’ Voluntary Liquidation and you will need to appoint a licensed insolvency practitioner to start the process.
Alternatively, you could wait for a creditor to wind up the company by going to court but this type of liquidation known as compulsory liquidation carries more risk, can be more stressful and can take at least a year. In both cases the insolvency practitioner will need to investigate the conduct of the directors and establish if the bounce back loan was used appropriately. Ultimately, in this case, the Bounce Back Loan and any penalties or fees associated, will be written off, as with any other unpayable debts for creditors.
If you would like further information or some expert advice, get in touch with us today. Just remember all we have said in this guide and keep in mind the top tip – do not ignore defaults as this will just worsen the situation!