Bounce Back Loans: what to do if you can’t repay?
By John Bell, Director of licensed Insolvency Practitioners Clarke Bell, which he founded in 1994.
The Bounce Back Loan Scheme was introduced by the Chancellor of the Exchequer in 2020 as a means of helping small to medium businesses struggling due to the coronavirus pandemic.
The scheme allows businesses to borrow between £2,000, and up to 25% of their turnover, limited to a maximum of £50,000.
Although applications for the scheme closed in March 2021, thousands of businesses took advantage of the government backed scheme to allow them to stay afloat during the pandemic.
However, with Bounce Back Loan scheme repayments now starting to kick in, from May 2021, many will be struggling to pay back what they owe.
John Bell is Director and founder of licensed insolvency firm Clarke Bell and here he explains the purpose of the Bounce Back Loan Scheme and what business owners can do if they cannot repay the loan.
What is the Bounce Back Loan Scheme?
The Bounce Back Loan Scheme was initiated by the government to help small to medium businesses that were originally excluded from the Coronavirus Business Interruption Scheme. It was designed to offer a quick cash injection to struggling businesses and keep them going during the coronavirus pandemic.
The loans are interest free for the initial 12 months and then have a 100% government backed guarantee for lenders. Once the first 18 months are up, there is an interest rate of 2.5% per year and repayments can be stretched for up to 10 years.
The loans can be used for a range of purposes, from paying staff wages, covering business rates to covering monthly business costs or overheads. However, they must be used for business purposes and cannot be used to pay dividends or to pay into a personal savings account.
Earlier this year, the government rolled out the Pay as You Grow Scheme which was designed to allow for more flexible repayment on Bounce Back Loans over fears that businesses will struggle to repay the money owed with the first repayments being due from May 2021.
This allowed companies to be able to delay repayments by a further 6 months, extend the length of the loan from 6 years to 10 years at the same interest rates and make interest-only payment for 6 months. However, many will still struggle to pay the loans back.
What happens if I can’t repay the Bounce Back Loan?
If a business can’t afford to repay the Bounce Back Loans, the declarations made at application stage will be reviewed by an Insolvency Practitioner and the company’s actions will be looked at closely and carefully.
This is because when applying for the Bounce Back Loan Scheme, business owners were asked to formally declare that the COVID-19 pandemic was the reason that their business was facing difficulties and that before the pandemic the business was ‘financially sound.’
So, if a company can’t pay back the Bounce Back Loans and is found to have provided false information in this declaration, the director might be made personally liable for the loan once the company has been liquidated.
What to do when your company can’t pay back the Bounce Back Loan?
Earlier this year, the Chancellor extended the flexibility of the loan, meaning businesses can make no repayments on their loans until 18 months after they originally took them out.
Businesses first began to receive loan payments in May 2020, meaning the first repayments are due in May 2021. So, if you are continuing to struggle, you can take advantage of delaying the loan repayments for a further 6 months.
However, if you can’t repay Bounce Back Loans due to a deeper cashflow problem within your business, it might be time to look at other options. These can include HMRC time to pay arrangements, options for business rescue including Company Voluntary Arrangement, or in the case that your business is not viable, liquidation via a Creditors’ Voluntary Liquidation.
Can Bounce Back Loans be written off?
As Bounce Back Loans are loans to the company, and not the individual such as the director, if the company goes into liquidation, the loan will be written off.
However, if some of the Bounce Back Loan has been used to pay for non-company items – such as paying the director’s home mortgage or other household bills – that amount will need to be repaid.
So, if you can’t pay back the Bounce Back Loan and your company is no longer sustainable, you might consider liquidating through Creditors’ Voluntary Liquidation (CVL).
This is a voluntary form of liquidation that allows the company to close whilst settling debts they owe to creditors.
A CVL is a formal insolvency process carried out by a licensed Insolvency Practitioner who liquidates the company, stopping it from trading and operating.
(This is opposed to Compulsory Liquidation, where a company is forced to stop trading by creditors who issue a winding-up petition to the court if a company owes them £750 or more and their payment demands have gone unfulfilled.)
Businesses struggling to pay back the Bounce Back Loans may also consider a Company Voluntary Arrangement (CVA.) However, this will only be available to companies that have real chances of business rescue.
A CVA is also an option open to insolvent businesses, however, unlike liquidation, a CVA aims to turn the business around and restore it to profitability.
A CVA allows an insolvent company to come to an agreement with creditors to repay its debts over a fixed period of time. Whilst a company is under a CVA, the director remains in control and it can continue to operate and trade.
This is a process that is also carried out by an Insolvency Practitioner who will work with the company directors and their accountant. An Insolvency Practitioner is also appointed to carry out the CVA.
Can’t repay Bounce Back Loans?
If your company is struggling financially and you now find that you can’t repay your Bounce Back Loans, it is important to seek professional advice so that your situation can be assessed and a plan devised to help you navigate the next steps, whether that might be liquidation through a CVL, or business rescue through a CVA.
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