In response to the economic effects of the Coronavirus pandemic, the U.K government implemented the Bounce Back Loan Scheme (BBLS). This scheme aimed to ease the financial pain suffered by companies, offering loans to help them through the worst of it.
While Bounce Back Loans were incredibly useful for some companies, allowing them to cover their expenses without much issue, this wasn’t the case for everyone. The pandemic went on for much longer than many expected, and the effects felt by some companies have simply been too much to bear. Some companies cannot afford to cover their operating costs, much less repay their Bounce Back Loan. If you’re in this situation, you might be wondering what options you have available.
In this article, Clarke Bell will discuss the implications of being unable to repay your Bounce Back Loan, and the options available to you in this situation.
What are Bounce Back Loans?
The Bounce Back Loan Scheme was the government’s answer to the financial damage suffered by companies. These loans offered companies up to 25% of their annual turnover, with a maximum cap of £50,000. These loans were intended to help companies pay costs critical to the company, such as payroll, utility bills, rent, stock purchases, and so on. The government guarantees these loans, meaning that borrowers are not required to offer any collateral or sign any personal guarantees. Moreover, these loans are interest-free for the first twelve months, with repayment being conducted monthly, similar to other loans.
While the accessibility of Bounce Back Loans helped get funds to companies that needed them, it is a double-edged sword. As we mentioned, some companies are not able to make repayments. If this mirrors your situation, you have a few options at your disposal.
Using the Pay As You Grow (PAYG) Scheme
It would be an understatement to say that preventative measures, such as lockdowns, lasted longer than expected. This has had a significant effect on business and the economy at large. This means that, while many companies aimed to repay their Bounce Back Loans, their forecasts represented a different future. As such, these companies could not make their repayments as estimated.
As these preventative measures lasted longer than anyone expected, the government has implemented the PAYG scheme. Rather than allow a huge number of companies to shutter, this scheme aims to give companies a bit more flexibility in how they pay their Bounce Back Loans. It does so by allowing companies to tweak their repayment terms in up to three ways. These are:
- Suspend repayments for six months – Arguably the most important of the three, this affords companies some considerable breathing room. For the duration of these six months, a company will not be expected to make any repayments whatsoever. This does not detract from the 12 months you were afforded once you took out the loan. Moreover, you are not required to have made any payments prior to requesting this payment holiday. However, this will lead to the overall amount due growing, as you will not be paying interest. This can be done once during your loan term.
- Interest-only payments – In addition to the aforementioned payment holiday, you can request a six-month window of interest-only payments. This will result in smaller payments during this time, while also keeping the overall amount due from growing. This can be done three times throughout your loan term.
- Extend the life of your loan – Directors can choose to extend the repayment term for four years. This extends a maximum term of six years to a maximum term of ten. While this can reduce the amount you pay monthly, you will pay more interest, as the interest rate remains at 2.5%.
These three tools can help directors get their company’s finances back under control. If your company is still struggling to make payments, it might be time to look at alternatives.
Alternatives to handling your Bounce Back Loans
If the solutions above to handling your Bounce Back Loan were insufficient, then filing for insolvency is likely necessary. A company that cannot pay its liabilities must act decisively; failing to act may result in your creditors taking legal action against your company first, which has a range of consequences.
To solve your financial problems and avoid your impatient creditors taking action against you, filing for a form of insolvency is a good idea. A Creditors’ Voluntary Liquidation (CVL) is, for insolvent companies, the best option. This procedure is a formal liquidation process, one that prevents legal action from being taken against a company by its creditors. This keeps the directors’ personal finances safe while also protecting them from the consequences of creditor action.
Legal protection is not the only advantage of the CVL procedure. Companies that opt for a CVL will be able to appoint a licensed insolvency practitioner as part of the process. Their role will be to execute the procedure, ensuring the company is liquidated efficiently, legally, and that obligations are upheld. Once the company is liquidated, the proceeds will be distributed amongst creditors first, then shareholders. Once all the funds are distributed, the company will then cease to exist as a legal entity. If any debt remains at this stage, it will be written off unless you have signed a personal guarantee as part of any loan agreements. If your Bounce Back Loan remains outstanding at this point, it too will be written off.
What happens if I cannot repay my Bounce Back Loan?
If you cannot repay your Bounce Back Loan, yet do not take action to remedy the situation, you may be opening yourself up to certain consequences. Firstly, though the government guarantees Bounce Back Loans, they require lenders to do everything in their power to recover the funds. As outstanding creditors have the power to issue a winding-up petition, you risk your company being forced into compulsory liquidation.
Another consequence of prolonged issues with repaying your Bounce Back Loan is personal liability. Depending on how directors spent their Bounce Back Funds, they may be held liable for the debt itself. Bounce Back Loan terms specified that the funds must be used to benefit the company, paying payroll, stock purchases, and the like. If directors have misused the funds yet cannot repay, they will likely have to pay out of their personal finances. Moreover, these directors may also face consequences such as disqualification, fines, and even a prison sentence in extreme cases. For these reasons, it is important to act first.
Let Clarke Bell help
If your company has been struggling under the weight of Bounce Back Loan repayments, then let Clarke Bell help. We have over 28 years of experience in helping companies find solutions to their financial problems, and we can do the same for you. For a free, no-obligation consultation, contact us today and find out how we can help you.