What to do if you can’t pay a Bounce Back Loan

The bounce back loan scheme was introduced during the covid pandemic to help small and medium-sized businesses struggling due to covid. Unfortunately, many businesses have not recovered since the pandemic, and they now find themselves unable to repay their bounce back loan.

What is a bounce back loan?

During the Covid-19 pandemic the UK government set up the Bounce Back loan scheme which allowed small and medium-sized businesses to borrow between £2,000 and £50,000 for up to 6 years. These loans were based on 25% of the company’s turnover up to a maximum loan of £50,000 and were based on self-certification. These loans had a low interest rate, no interest was charged for the first 12 months and neither the company nor the directors were required to provide any security to the lending bank, no personal guarantees were required and the lending by the funders was guaranteed by the government. 

The loans were quite specific that they were not to be used for personal purposes, but for an economic benefit to the business; it could be used, for example, to purchase a company asset, working capital, assist with paying wages.

Will bounce back loans be written off?

This is very unlikely as lenders cannot rely on the guarantee provided by the government unless they can demonstrate that their own debt collection procedures have been exhausted.  

However, there are options available to assist businesses repay their loans called Pay As You Grow (“PAYG”) rather than default on the liabilities. These are:-

  • take a repayment holiday for up to six months
  • reduce the monthly repayments for six months by paying interest only, which is available up to three times during the term of the loan
  • request an extension of the loan term from 6 years to 10 years at the same interest rate of 2.5% 

The loan is like any other business loan and if you have not chosen a PAYG option and have missed repayments the lender will start proceedings to recover their money.

Current government guidance says that if the money your company borrowed is not repaid, your company may be investigated by the Insolvency Service, even if it has been dissolved. The only way to ‘write off’ your loan is to put your company or yourself into a formal insolvency process.  However, if you have misused the bounce back loan, then you are likely to be personally targeted even if the debt falls under an insolvency write off. 

Did you misuse the bounce back loan?

The loans were made available to assist small and medium sized businesses access to emergency funding for the economic benefit of the business, subject to eligibility criteria which were:

  • the business had to have been adversely impacted by coronavirus
  • be based in the UK
  • have been established before 1 March 2020
  • the amount available was 25% of turnover based on self-certification

The government are taking a very hard line on the misuse of bounce back loans, and are pursuing criminal convictions for fraudulently obtaining a bounce back loan. 

It is also possible to be disqualified as a director even if you have not put your own company into liquidation. This can be done following an investigation of the company by the Insolvency Service, if it appears that it is in the public interest that a disqualification order should be made against a person who is, or has been, a director or shadow director of a company. It should also be noted that a financial compensation order can be made against a director personally.  

What are the consequences of not paying back a bounce back loan?

If a bounce back loan is not paid, then it is likely that the lender will take action to recover this, and this may include putting the company into liquidation.

The general position is that directors enjoy limited personal liability if their company goes into liquidation.  However, if a company goes into liquidation having failed to repay a bounce back loan, then the circumstances around the loan will be investigated, both by the liquidator and also by the Insolvency Service.  If misconduct was found then financial action may be taken against a director personally by a liquidator or administrator.

Some examples of misconduct are: providing false information on a loan application, using the loan for personal benefit, or dissolving your company to avoid repaying the loan. If misconduct is found against a director, then it may be that they will have to repay the loan personally.

If a sole trader business can’t repay their loan, they will become personally liable for this as they don’t enjoy the benefit of limited liability as a company director does. However, while they can be made personally liable for a Bounce Back Loan, according to the British Business Bank, which implemented the scheme on behalf of the government, recovery action cannot be taken against a main residence or main personal vehicle. However, other personal assets can be recovered and ultimately the lender could apply for bankruptcy to recover the debt, which would then allow for the residence and vehicle to be sold for the benefit of creditors.

If a sole trader is made bankrupt having failed to repay a bounce back loan, then the circumstances around the loan will be investigated by the trustee in bankruptcy and also by the Insolvency Service.  If misconduct was found then a bankrupt may be subject to a bankruptcy restriction order, which extends the consequences of bankruptcy for up to 15 years. This means credit is restricted as well as other conditions put in place during this time, and the bankrupt may not be a company director during this time either.

The only way to effectively ‘write off’ the debt, other than bankrtupcy, is to enter into a formal insolvency arrangement such as an Individual Voluntary Arrangement (IVA).  This would require a majority (75% in value) of your creditors to agree the IVA, but if implemented and honoured by you, your pre IVA debts will all be included and cannot be claimed against you using other methods.

How we can help

If you are having difficulties repaying your bounce back loan then don’t ignore it. The sooner you address the problem, the more options you will have. It is not always clear which options are the right ones for your business. Our experienced team can look at the best options with you to resolve your issues. The first step is to call us.

Call our Business Rescue Service now on 0800 118 2948

You don’t know what we can do until you ask.

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