The UK economy saw a great deal of upheaval in 2020, with much of it being connected to the Coronavirus pandemic. As a response, the government implemented a series of policies and initiatives to help ease the problems that both businesses and members of the public were facing. One such example is the Bounce Back Loan Scheme (BBLS).
The BBLS was implemented primarily to ease the burden faced by small and medium-sized enterprises (SMEs). The idea was simple; provide SMEs with a loan to help them stay open and stimulate the economy, and the country will reap the rewards once it reaches the other side.
Although the effects of Coronavirus are still being felt, the BBLS is considered to have served its purpose, and is no longer offered to SMEs. However, many directors have questions and concerns regarding certain aspects of the BBLS, while others are experiencing significant problems that threaten the health of their businesses.
In this article, Clarke Bell aims to offer directors a comprehensive guide regarding Bounce Back Loans. In it, we will answer the most impactful questions, provide solutions to your company’s problems, and ensure you know exactly where you stand with your Bounce Back Loan.
What is the Bounce Back Loan Scheme?
The BBLS was implemented as a means to keep SMEs afloat. The scheme offered companies between £2,000 and £50,000, depending on their income, which the government would guarantee. In practice, this gave SMEs a low-risk loan with a decent upper limit, and proved to be effective for some companies that needed a moderate amount of finance.
Although low-risk and generally beneficial to borrowers, Bounce Back Loans were approved with the expectation of repayment. This was outlined in the Bounce Back Loan agreement, amongst a few other terms. While the government guaranteed the loan, companies were still expected to make every effort to repay their Bounce Back Loan. Additionally, lenders were expected to exhaust all avenues to obtain repayment before the government would step in. However, both of these expectations are easier said than done, and although the time has come for repayment, many companies are having trouble.
Will Bounce Back Loans become grants?
As a result of repayment issues, the question of Bounce Back Loans becoming grants has been asked by many directors. This isn’t an unreasonable question, either; plenty of loans that cannot be repaid are written off or forgiven, and it’s understandable to think that a government-backed loan might fall under this category. However, this is not the case. Bounce Back Loans will not become grants, and companies must make repayments, or risk the ire of HMRC.
As part of the Bounce Back Loan agreement, borrowers agreed to repay the loan in full. While there is some wiggle room, you will need to respect this obligation, or potentially face HMRC-led investigations and penalties.
If you are struggling to make repayments, don’t ignore your loan; you have a few options at your disposal.
Pay As You Grow Scheme
While the BBLS was a success in some instances, many companies did not benefit as much as they had hoped and are now struggling with their repayments. To alleviate the problems faced by companies struggling to repay, the government implemented a second scheme – Pay As You Grow (PAYG). This scheme packaged three key options that can help make repaying a Bounce Back Loan easier.
1. Six-month repayment holiday
The first option the PAYG scheme allows you to take is a six-month repayment holiday. Combined with the twelve-month payment holiday all borrowers receive at the start of the loan term, you can effectively defer the payment of your Bounce Back Loan for 18 months. This option can be taken immediately once the first twelve-month repayment holiday ends, or at any other time during the loan term. While this can certainly be useful in stabilising your company’s cash flow, take note that interest will continue to accrue during this time, and you will end up paying more in the end.
2. Six-month interest-only payments
The second option the PAYG scheme offers is a six-month interest-only payment window. As the name suggests, this window allows you to reduce your monthly payments to cover only the Bounce Back Loan’s interest. This will save you a considerable sum over the full six-months, while preventing interest from accruing. Borrowers may use this option as it suits them, and can do so up to three times throughout the loan term.
3. Spread payments over an additional four years
The final option that can be taken as part of the PAYG scheme is to extend the term of your Bounce Back Loan. The standard repayment term is six years, but if your company is struggling to make ends meet, you can take a four-year extension, giving you ten years to make repayments. This will greatly reduce your monthly expenditure, but you will end up paying more due to interest.
What happens if I can’t pay?
If you still can’t pay after making use of the PAYG scheme, you’ll need to act swiftly to prevent your situation from deteriorating. While payment difficulty isn’t necessarily the end of the world, inaction may well cause your creditors to escalate the situation. For example, your lender is likely to take action against you in order to recoup the outstanding loan amount. This is in accordance with their end of the Bounce Back Loan agreement, as we mentioned earlier.
If your Bounce Back Loan lender decides to take action against you, it is likely to start off fairly unobtrusively. Letters or phone calls regarding payment are likely to be the first port of call, and lenders tend to only escalate if you are uncooperative, or clearly unable to pay. Thankfully, you are not out of options even in the most dire financial circumstances.
Are company directors personally liable for Bounce Back Loans?
Before we discuss your options if you can’t afford to repay your Bounce Back Loan, let’s first touch on personal liability. In most cases, company directors will not be held liable for their company’s Bounce Back Loans. Unsurprisingly, there are exceptions to this rule, with the most notable being misconduct.
Directors who have misused their Bounce Back Loan, i.e. not abided by their Bounce Back Loan agreement, may be held personally liable. Cases where directors are held liable are uncommon, however. It is appreciated that not every company will have the same needs, with some requiring the loan to pay for stock or staff, while others need the funds for debt repayments. The only hard rule is that the money must have been used for the benefit of the company. In other words, if you have spent your Bounce Back Loan funds on personal purchases, you may be held personally liable for the debt.
Your options if you can’t pay your Bounce Back Loan
If you have fallen into arrears and can’t repay your Bounce Back Loan even with the help of the PAYG scheme, you still have a few options at your disposal. These options come in the form of insolvency procedures, and can help both you and your company reach a favourable outcome. Whatever you decide, it is vital you act quickly to ensure you have the initiative. To that end, obtaining professional advice will be very helpful.
Creditors’ Voluntary Liquidation
A popular option is to place your company into a Creditors’ Voluntary Liquidation (CVL). This insolvency procedure offers a range of key benefits, starting with the ability to appoint an insolvency practitioner of your choosing to the role of liquidator. In this role, the liquidator will essentially take charge of the company to carry out the procedure of closing down the company. The liquidator will identify any company assets and accounts, dispose of them for the highest value, and distribute any proceeds amongst creditors. Once all possible distributions have been made, the company will be wound up and struck off from the Companies House register. At this point, it will cease to exist as a commercial entity.
While it might not be your first preferred option, the CVL procedure can help you achieve a very favourable outcome. It can help directors of insolvent companies struggling with Bounce Back Loans in three primary ways…
- Any debts that remain outstanding at the point of closure will be written off, excluding those secured by a personal guarantee. This includes Bounce Back Loans, and the government will step in to reimburse your creditor the outstanding amount.
- Once the company enters the CVL process, it will be protected from legal action. This means that creditors will not be able to submit a winding-up petition, which effectively protects your company from compulsory liquidation.
- As the CVL process shows you had the initiative to act on your creditors’ behalf, it will play in your favour should any accusations of misconduct be levelled against you.
If you have a viable business plan at your company’s core, administration may be an option. Administration offers companies a means of regaining profitability and remaining in operation.
An administrator will pursue a trio of objectives depending on the company in question.
- Generally, the first objective will be to rescue the company as a going concern. That is to say, make the company profitable again through restructuring or negotiation. This objective is typically achieved in one of two ways; negotiating with a company’s creditors or the implementation of a business rescue plan. If your company cannot pay back its Bounce Back Loan even with the aid of the PAYG scheme, your creditor isn’t likely to hear any attempt at negotiation, leaving the latter as the only option.
- The second objective of company administration is to sell some or all of the company, in order to raise the funds required to repay creditors. This can be achieved by selling off company assets, unprofitable portions of the company, or the company in its entirety.
- If the company cannot be sold, the third objective, liquidation, will be pursued. The administrator will place the company into Creditors’ Voluntary Liquidation, which will proceed as we outlined earlier. The company’s assets will be sold to repay outstanding creditors, and any loans that remain after the company closes will be written off, including Bounce Back Loans.
This is not an option that we would recommend you take, but some people do choose it. If you decide to take no action about the Bounce Back Loan which you owe (or any other company debts you have), your creditors are likely to issue a winding up petition against you. The result of this will normally be that your company is placed into compulsory liquidation.
This might seem like an easy option, however there are several disadvantages to being the director of a company that has been placed into compulsory liquidation, including:
- your future credit terms from lenders may be badly affected
- business people (including customers and suppliers) may see you as someone who has been complacent about your legal duties as a company director.
- professionals (e.g. banks, accountants and solicitors) often take a dim view on directors who let their company go into compulsory liquidation
These effects may be felt when you put a company into a CVL. However, because you’re being pro-active and voluntarily putting your company into liquidation, in our experience the effects are likely to be far less with a CVL.
Can I strike off a company with a Bounce Back Loan?
A common question asked by directors is whether it is possible to strike off a company with a Bounce Back Loan. The answer is a resounding no. Doing so can leave you vulnerable to legal problems. This is because company strike-offs, also known as dissolutions, are intended for solvent companies looking for a cost-effective method of closing. If your company cannot pay its debts, it is ineligible for a strike-off.
That said, it is still possible to initiate a strike-off for an insolvent company, so why exactly is it considered a bad idea? Strike-offs are straightforward to initiate, requiring the filing of a DS01 form. This form can be submitted to Companies House either in paper format or through their online portal, costing £10 or £8, respectively. Once the form is submitted, the intentions of the directors to close the company will be made public. It is here that problems will likely emerge for insolvent companies.
Once the intent to strike off the company has been made public, objections can be lodged to stop the process. These objections can be made by outstanding creditors, in addition to other related parties. If your company has been struggling with its Bounce Back Loan, your creditor is likely to pick up on this attempted strike-off quickly. Even if it escapes their notice and the process is completed, the company can be reinstated at the behest of creditors for the purposes of loan repayment.
If directors are caught attempting to strike off their insolvent company, it is likely that one of two scenarios will play out…
The first is that outstanding creditors simply escalate the situation, possibly using a winding-up petition to force the company into compulsory liquidation. This will be done to recoup as much of the outstanding loans as possible.
The second potential scenario is that the company will still face harsher payment collection methods, but directors will also face penalties for attempting to escape the debt. These penalties include the following:
- Disqualification of a director’s license for up to 15 years.
- Personal liability for company debts, including Bounce Back Loan debt
- An order to repay funds to the company
- Prison sentence
Naturally, it is far better to avoid risking an unfavourable outcome as a result of dissolution, and instead place your company into a Creditors’ Voluntary Liquidation. Not only do you lower the risk of facing harsh penalties, but you also access a host of strong benefits that can make handling an insolvent company much easier.
Clarke Bell can help you
If you are struggling to repay your Bounce Back Loan, don’t struggle alone – let Clarke Bell help.
We have more than 29 years of experience in helping directors to find the best solutions to their company’s debt problems. We can do the same for you.
Contact us today to find out exactly what we can do for you. (There is no charge for the advice.)
Bounce Back Loan Scheme – FAQs
What can I use my Bounce Back Loan for?
As the needs of companies vary from one to the next, there isn’t a set number of uses for Bounce Back Loans. Anything that can benefit your company will be acceptable. This includes covering the cost of stock or staff wages, paying tax bills or the rent for business premises, and so on. Provided you haven’t used your Bounce Back Loan for personal expenses, you will be in line with your agreement.
What happens if I used some my Bounce Back Loan for personal expenses?
When a company goes through the liquidation process, part of the role of the liquidator is to conduct an investigation into the history of the company. Included within this will be looking at how the Bounce Back Loan was used. If some of the Loan was used for paying personal expenses, then the directors will be personally liable for that amount. As liquidators, we would liaise with the directors to work out a settlement figure and payment schedule based on the directors’ financial situation.
The clients we deal with are keen to get the matter sorted once and for all, so that nothing will come back to haunt them in later months of years.
Will using Pay As You Grow affect my ability to obtain a loan in the future?
In general, using the PAYG scheme will not affect your chances of obtaining finance in the future. Assuming you can make a full repayment, you will still uphold your obligations to creditors, even despite the financial difficulty. This means that your credit rating will not suffer. That said, the decision is ultimately up to your future creditors, who will be able to see that you used the PAYG scheme. While many will not view this as a problem, some might.
What are the fees and interest rates for Bounce Back Loans?
Bounce Back Loans are very cheap, compared to most other loans currently available. Lenders were not able to impose any fees or hidden costs on the loan, so interest is the only additional expense borrowers must pay. This interest rate sits at 2.5% per annum, which is a rarity in finance.
If your company is struggling to make repayments, there are options you can use for assistance. While they won’t lower the overall cost, they can help spread out your repayments and lessen the financial burden your company must shoulder.