What are Bounce Back Loans?

Bounce Back Loans (BBLS) were introduced in March 2020 to help out struggling businesses. This period was the start of the first lockdown and that meant it was also the start of a really tough time for a lot of business owners, particularly those who worked in sectors such as hospitality. 

Essentially, they offered a big lump of short-term cash that could have been used to fix some glaring financial concerns or it could have been invested with a view to long-term future planning. This amount of cash varied from £2,000 to £50,000. However, the amount that you could borrow was capped at 25% of your turnover from the previous year, or your estimated turnover. 

Businesses that hadn’t already borrowed the full amount could also “top-up” their initial loan. The minimum amount that you could add onto the initial loan was £1,000. 

Bounce Back Loans were completely backed by the state and required no repayments or interest within the first 12 months. After 12 months, banks charge a fixed 2.5% annual interest on top of their initial loan. 

The BBLS has given out £46-billion since it came into action, helping millions of people in a time of crisis.  

What is Pay as You Grow (PAYG)? 

The BBLS works with another governmental scheme, amusingly called Pay as You Grow (PAYG): a scheme designed to help borrowers with their repayments. 

You can have that if you don’t make repayments extended to 18 months but banks will still start charging interest after 12 months anyway, so this option is really only for people in a bad financial difficulty. 

These loans can last for upto 10 years with a fixed 2.5% interest rate annually, after that first year. The reason for this was to cut monthly repayments by almost half of what they could have been, allowing borrowers a more sustainable way of making their repayments.

Statistics in April showed that more than 1.5 million UK businesses benefited with the bounce back loan as they looked to counter their financial struggles. 

What will happen if I genuinely can’t repay my Bounce Back Loan?

The PAYG scheme is designed to offer a little bit of wriggle room for those who might not be completely on top of their payments. Making repayments might still feel like a step too far for many. However, there are ways around this. 

One of the main benefits of the BBLS is the fact that the loan itself is unsecured. This means that the loan is taken out without any collateral such as property. We wouldn’t necessarily advocate unsecured loans but, in this instance, it might be beneficial because it comes with government guarantee because they gave 100% security to the banks for these loans. However, government backing only comes into play if a business is declared insolvent, so a trading business that is still in operation will still have to pay the money back themselves. 

Therefore, while company directors should feel a little relief, they should also be aware that governmental intervention is very much the last case scenario. They will still be expected to make repayments unless the situation gets very desperate.

Can I use my Bounce Back loan to plan for the future?

As noted at the start, many businesses will see the BBLS as an opportunity to invest in their future. With this in mind, you might be able to come to an arrangement with HMRC. These are called Time to Pay (TTP) arrangements. You could be granted an additional 12 months to keep on top of your payments if you are able to put together a convincing cashflow forecast, highlighting where you believe you’ll be making your profit. 

Some businesses may be juggling a series of loans alongside their BBL and, in that instance, a Company Voluntary Arrangement (CVA) could be the best solution. The CVA will allow a debtor to make a single monthly payment towards your creditors for a set number of years. Only a licensed insolvency practitioner can sanction your CVA and it will also have to get the consent of your creditors. You will need to provide a thorough plan that your creditors can get behind. 

Can I go insolvent with a Bounce Back Loan? 

If your business goes through liquidation then the BBL will work in the same way as any other loan that was taken up in that time. This means that should the company become insolvent and needs to enter a formal liquidation process, the Bounce Back Loan will be included.

There are two ways to push through with insolvency:

  • A creditor forces you into liquidation but this is a long process, including a court case.
  • Directors can push through the liquidation of the company themselves. This is known as a Creditors Voluntary Liquidation (CVL).

A licensed insolvency practitioner will go through the entire process. This means that they will identify company assets, sell off those assets for the benefit of creditors, and they will organise the whole procedure on your behalf. 

The final result of the liquidation is that the company will no longer exist as a legal operator, and any debt remaining from this point forward will be written off unless it has previously been secured with a personal guarantee. A Bounce Back Loan is included in this. 

Did I mistakenly take a Bounce Back Loan?

There are two different levels of fraud: soft fraud and hard fraud. 

Soft fraud is overestimating figures in order to gain access to a larger loan. Exaggerations will be based on fairly legitimate evidence. Many people will fall into this category and they will need advice on how to best deal with this situation. 

If you think you are going to be accused of BBL fraud then you should immediately seek legal help. You may have accidentally overestimated figures or unintentionally mislead those offering the BBLS, so it’s important to make sure that you will be fully prepared for any negative outcome. 

We can help you to understand the makeup of your situation and we can work out the best solution for your problem. 

When could a director be personally liable for a Bounce Back Loan?

As noted beforehand, the government’s guarantee for 100% of the BBL was seen as a major plus for potential lenders. That meant there was no requirement to provide a personal guarantee before you acquired the loan. 

Nonetheless, if you cannot back up the reasoning as to why you got the loan in the first place then you could be held personally liable for it. BBLs are designed to financially improve your business and you should be able to provide evidence as to how they have done that. 

On the other hand, if the loan has been used sensibly then the company’s debts will be written off through liquidation. 

In what way can a director be personally liable for a Bounce Back Loan? 

A director can be made personally liable if payments are made in terms of preference as opposed to necessity. What this means is that payments were made to certain creditors while others were ignored. Using the loan to pay off certain creditors whilst simultaneously ignoring others. 

A director might have also misused the bounce back loan. If the administrator or liquidator comes to analyse the situation, they could make you personally liable for that situation. Essentially, it is important that you are willing to follow the rules of the agreement when it is signed. 

If you follow the agreement in good faith and knowledge, you are not likely to be left personally liable for any of the debts that come your way. 

Can you write off Bounce Back Loans?

They can be written off because they were given on behalf of the company and not the individual. If the company becomes legitimately insolvent then the BBL will be written off through liquidation.

As with the vast majority of loans, Bounce Back Loans are designed to be repaid through a series of monthly payments made directly to the lender. Bounce Back Loans differed in that a 12-month payment holiday was automatically applied to the borrowing, however, once this ended, it was the borrowing company’s responsibility for ensuring the loan was repaid as per the initial agreement.

The problem, however, is that when companies first took out these Bounce Back Loans, the future situation was unclear. Very few would have predicted lockdown measures and local restrictions would have stayed in effect for so long. This has meant that while these loans may have been taken out in good faith, some businesses are now finding themselves in the position where trade has not yet returned to pre-pandemic levels, meaning repaying the borrowing as planned is simply not possible.

In order to help these companies, the government introduced a scheme known as Pay As You Grow (PAYG) which is designed to help those businesses who need additional help and time to repay their Bounce Back Loan.

How can the Pay As You Grow (PAYG) Bounce Back Loan scheme help?

The PAYG scheme allows a company who has taken out a Bounce Back Loan, three main ways of reducing the monthly financial burden if they are struggling to find the money to repay what they owe. If you cannot afford to repay your Bounce Back Loan, here is how the PAYG scheme could help:

  1. The chance to delay repayments for six months. This is on top of the first-year payment holiday which you will have been given when you took out the Bounce Back Loan. You do not need to have made any repayment towards your Bounce Back Loan in order to qualify.
  2. You can lengthen the term of the Bounce Back Loan from six years to ten years. By doing this, you can halve your monthly repayments which could make a huge difference to your cash flow during this time.
  3. You can ask to make interest-only payments for six months. This will lessen the amount of your monthly repayment for these months, while also ensuring you are not paying any additional interest as you would if you took a payment holiday.

What will happen to me if I cannot pay my Bounce Back Loan?

While the flexibility offered by the PAYG scheme will give some companies the breathing space they need to repay their Bounce Back Loan, for others, this will simply not go far enough. It may also be the case that the Bounce Back Loan is just one of several loans or finance agreements the company has, and trying to repay them all is a step too far. So, what happens if your company is unable to pay the Bounce Back Loan, and can you be held personally liable for this debt?

One of the main benefits of the Bounce Back Loan was that the government provided the banks with 100% security for the money they lent. From the company’s perspective, this meant that no personal guarantee had to be provided to secure the borrowing. Instead, if the company is not able to repay the money owed on the Bounce Back Loan, the bank will turn to the government for repayment rather than the company director themselves.

While this security should provide some comfort to company directors, you should be aware that this government guarantee will only come into effect if the company is declared insolvent. While your company is still trading and is an active company on Companies House, you remain responsible for repaying the Bounce Back Loan.

What are the options for restructuring my limited company with a Bounce Back Loan?

If you believe your company will struggle to repay its Bounce Back Loan, but it is still a profitable business, you can consider a range of restructuring and refinancing options that could help ease your cash flow in the immediate future.

For many, the Bounce Back Loan will be one of several debts the company is holding. If this is the case, you can look at entering into negotiations with your other creditors in order to lower your monthly outgoings to a more affordable level.

HMRC arrears can often be incorporated into a Time to Pay (TTP) arrangement, which is a payment plan entered into directly with HMRC. As long as you can adequately prove your case, you may be given an additional 12 months in which to clear any owed taxes. You can present your proposal to HMRC yourself, or alternatively, the experts at UK Liquidators can do this on your behalf.

For those who are juggling a number of loans, credit cards, and supplier debts, a formal process known as a Company Voluntary Arrangement (CVA) may be more appropriate. A CVA allows you to make just one monthly payment towards your debt to a number of creditors for a set number of years. A CVA can only be entered into under the guidance of a licensed insolvency practitioner, and once all creditors agree to the terms, the agreement becomes legally binding on all parties. This provides you with long-term certainty over your debt, however, you must be able to prove that your business is viable as a trading entity before creditors will give their consent to the proposal.

Can I close my business with a Bounce Back Loan?

For the purposes of liquidation, a Bounce Back Loan is treated in the same way as any loan or finance agreement. This means that should the company become insolvent and needs to enter a formal liquidation process, the Bounce Back Loan will be included.

The liquidation of an insolvent company can be done in one of two ways. The first is to wait for a creditor to force the company into compulsory liquidation; this requires a court order and can be a lengthy process. The other option is for directors to initiate the liquidation of their company themselves. This is done through a CVL.

A licensed insolvency practitioner will be appointed to handle the entire process, including identifying company assets, selling these for the benefit of creditors, before distributing the proceeds according to a set hierarchy.

The end result of the liquidation is that the company will cease to exist as a legal entity, and any debt which remains after this point will be written off unless this has previously been secured with a personal guarantee. This includes the Bounce Back Loan. As this type of borrowing did not require the security of a personal guarantee, you will not be held personally liable for repaying these funds so long as you have used them in an appropriate manner.

How do I know if I have misused Bounce Back Loan funds?

When Bounce Back Loans were launched, they were done so in order to provide as much help to as many businesses as possible. As every company was facing its own challenges at the time, the rules simply stated that the loan must be used to provide an economic benefit to the business.

For some, this could have been used to improve working capital, to purchase machinery, equipment, or stock, for modifications to allow the business to adapt to its changing landscape, or to supplement staff wages. The main criterion was that the Bounce Back Loan was to be used within the business; it was not meant for personal use. Those found guilty of misusing their Bounce Back Loan could be held personally liable for repaying them should the company be unable to do so.

Inappropriately using the Bounce Back Loan Scheme (BBLS)

Bounce Back Loans were open to all SMEs across Britain when the global pandemic was causing financial unrest. Different sectors were having different issues so the government made the loan flexible for all businesses. 

For some businesses, the Bounce Back Loan was used as a way of investing for the troublesome months ahead, allowing trade to continue, while others used it to tackle existing company debts. There was no one-size-fits-all way to use the loan and both of these methods were appropriate. 

Bounce Back Loans could also be used to pay existing members of staff – including directors, dividends, and regular employees. However, rules around taking unlawful dividends and ensuring sufficient profits existed in the business, still applied.

Bounce Back Loan fraud or misuse

A big issue with the Bounce Back Loan would be using it for personal gain as opposed to the benefit of your company. This could be by spending it on personal purchases without taking it out of the business as a salary or dividend. 

Misusing Bounce Back Loan money in this manner could have serious consequences if the business is unable to repay the loan in the future. If your company enters liquidation and you are found guilty of misusing the Bounce Back Loan, it could be seen as fraud. You would then be held personally liable for the outstanding balance. 

What happens if I have accidentally misused a Bounce Back Loan?

If your company is still okay to make the necessary Bounce Back Loan repayments then you will be fine. You will not be asked what the money was spent on. It is only when a company is forced to close that the spending of your loan will be investigated. 

If your company is forced to stop trading and close down with an outstanding Bounce Back Loan, this will also cause a big investigation into the spending of those funds. If you spent funds on personal luxury then you will be held personally liable for the debt. At the end of the day, that loan was designed to better the performance of your business and, in turn, that should allow for a repayment to be made. 

Conclusion 

Overall, the BBLS provided a necessary respite for many flailing businesses. Like the furlough scheme, it allowed businesses to move through the pandemic with less of a cashflow concern than they would have had. 

However, there are many people who will find themselves in a financial struggle after taking up the option of a BBL. Here at Business Helpline, we’re here to help you! We can discuss all of your options and help you plan for a better future. 

Bounce Back Loans (BBL) issues are starting to hit home for many businesses

Bounce Back Loans (BBL)  are starting to hit home for many businesses