In this article, we will explore the background of the Bounce Back Loan Scheme and what options your company has if it is unable to maintain its contractual payments and what the consequences of each action will have.
- The Bounce Back Loan scheme
- Pay As You Grow (PAYG) Scheme for Bounce Back Loan Repayment
- Bounce Back Loan Scheme -What if you still can’t pay?
- What Options Does Your Company Have regarding Bounce Back Loan Scheme?
- Can You Strike Off Your Company With an Outstanding Bounce Back Loan?
- How can you close your business with a Bounce Back Loan Scheme loan outstanding
- Can you write off a Bounce Back Loan?
- Misuse of Bounce Back Loans
- Can You Be Held Personally Liable for a Bounce Back Loan?
The Bounce Back Loan scheme
The Bounce Back Loan scheme was introduced by the UK government to provide financial assistance to small and medium-sized businesses during the pandemic. The loans were backed by a government guarantee meaning that no personal guarantees by company directors were required as the loans would be paid by the government in the event of company insolvency.
These loans were initially offered for a six-year term with no repayments required in the first year. A fixed interest rate of 2.5% applies to these loans with the government covering the interest and additional fees for the first 12 months of the loan term.
As a result of the impacts of the pandemic on businesses lasting much longer then originally anticipate, the chancellor of the exchequer launched the Pay As You Grow (PAYG) scheme in September 2020. The scheme provided further elements of relief for businesses that had taken advantage of the bounce back loan scheme.
If you are struggling with the monthly payments on your Bounce Back Loan, contact our team of insolvency experts at Company Doctor on 0113 237 9503 or message us through the contact options on this page to discuss your options.
Pay As You Grow (PAYG) Scheme for Bounce Back Loan Repayment
The Pay As You Grow scheme introduced three key options for businesses in terms of Bounce Back Loan repayment. These options were:
- The option to defer repayments for a further six months – This payment holiday is available to all businesses from their first repayment due date. However, interest continues to accrue during this period increasing the overall cost of the loan.
- The option to extend the loan term from six to ten years – This extension could reduce monthly repayments by almost half making it easier for businesses to keep up with the repayments.
- The option to make interest-only payments for six months – This move reduces the monthly repayment burden temporarily and ensures that no additional interest will be charged on the loan.
Bounce Back Loan Scheme –What if you still can’t pay?
If you’re worried about the repercussions of being unable to repay your Bounce Back Loan, rest assured that personal liability is not an issue as long as you have followed the rules. Even if all options provided by the Pay As You Grow program have been explored and there’s no way for your company to pay back the loan, there will be held liable for any of the loan balance.
The government granted all lenders 100% security under the Bounce Back Loan scheme which eliminated the need for you to provide a personal guarantee. In the event of insolvency and your business fails to pay back its loan, the government will step in and take responsibility and ensure that repayment of the outstanding loan.
However, your company cannot simply declare that it cannot repay the loan and expect the government to repay it. The government’s security on the loan only comes into effect if your company enters a formal liquidation process such as a Creditors Voluntary Liquidation (CVL).
It is important to note that if there is any evidence that you have misused the Bounce Back Loan, you could be held personally responsible responsible for repayment.
If your company is struggling to repay the loan there are still options available. These may include negotiating with creditors, refinancing or restructuring operations. It is important to explore all options before defaulting on the loan.
What Options Does Your Company Have regarding Bounce Back Loan Scheme?
If your company is struggling to repay its Bounce Back Loan, there are several options available to you. These include:
- The Bounce Back Loan Pay As You Grow (PAYG) scheme – This option is available to all bounce back loan borrowers. As discussed earlier, this allows for the term of the loan to be extended from 6 years up to 10 years reducing monthly repayments. The scheme also allows borrowers to either take a 6 month payment holiday or to reduce monthly payments to interest only for the same period.
- Consider alternative finance options – The PAYG scheme may not be suitable for all businesses especially if your situation is more precarious. You may therefore want to consider other finance options such as debt restructuring to reduce the monthly burden. You could also consider asset-based lending or invoice financing if your business is already geared up to take advantage of these methods. These options may provide you with more flexibility and lower monthly repayments than your Bounce Back Loan.
- Negotiate with your lenders: If you have other debts in addition to the Bounce Back Loan you may be able to refinance or consolidate your other business debts with more favourable terms such as lower rates of interest or lower monthly repayments over a longer period of time.
- Seek professional advice: If you have exhausted all the above options, your company could be insolvent and you should therefore seek advice from a licensed insolvency practitioner (IP) to explore your options. Here at Company Doctor, we can assess your situation and determine whether a Creditors Voluntary Liquidation or a Company Voluntary Arrangement (CVA) are appropriate. a CVL will allow for your company to be closed in an orderly and legal way with the outstanding Bounce Back Loan balance being settled by the government’s guarantee.
Can You Strike Off Your Company With an Outstanding Bounce Back Loan?
If you are considering striking off your company with a Bounce Back Loan outstanding, there are some important things to keep in mind:
You cannot strike off your company if it has a Bounce Back Loan
If your company has outstanding debts, including a Bounce Back Loan, you cannot strike it off. Instead, you will need to arrange to pay off the debt before you can apply for the company to be struck off.
HM Revenue & Customs in conjunction with Companies House and the Insolvency Service are clamping down on limited companies that attempt to strike off with a Bounce Back Loan outstanding with many applications automatically rejected.
Striking off your company does not automatically cancel your Bounce Back Loan:
If your company is struck off you will still be responsible for repaying your Bounce Back Loan. The company’s liability only ends once the loan has either been repaid in full or the company has entered a form of liquidation.
Striking off your company could have legal consequences
Striking off your company while it has outstanding debts could be seen as an attempt to avoid paying your creditors. This can have serious consequences such as being made personally liable for the outstanding bounce back loan and being disqualified from being a company director for a period of time.
How can you close your business with a Bounce Back Loan Scheme loan outstanding
If you’re a company director who has taken out a Bounce Back Loan and is now facing financial difficulties that are making it impossible to repay, you may be considering closing your business. However, closing a business with outstanding debt can be a complicated process and there are several options to consider.
Closure options for insolvent companies
Creditors Voluntary Liquidation: For businesses that have a Bounce Back Loan, one viable option is to enter into an insolvency procedure referred to as a Creditors Voluntary Liquidation (CVL). This route requires the appointment of a licensed IP who will act as liquidator to manage and ultimately distribute all company assets amongst creditors upon closure of business operations.
To commence the liquidation process the directors of the company will pass a resolution to voluntarily liquidate the business. The IP will then take over the running of the company in the role of liquidator which involves selling the company’s assets to pay off the creditors. Any remaining debt including the bounce back loan will be written off. The business will then be formally closed and struck off the register.
Compulsory Liquidation: If the business has no assets and the company directors have no means to fund a CVL, it may be possible that one of your other creditors such as HM Revenue & Customs will petition for a Winding Up Order to be granted which will result in an Official Receiver being appointed to handle the closure of the business via a Compulsory Liquidation.
It is important to note that one of their duties will be to investigate both the validity of the application for the Bounce Back loan as well as what the funds were used for to check for any evidence of fraud or misuse of funds.
Alternative Options to Closure: It’s important to note that a CVL or compulsory liquidation may not suitable for every business. It’s generally only recommended for companies that are insolvent and have no realistic prospect of recovering. If your business is still viable and may just be struggling with short term cash flow issues, there may be other options available to you such as a Company Voluntary Arrangement (CVA) or administration.
If you’re considering closing your business that has a Bounce Back Loan balance outstanding, it’s important to seek advice from licensed insolvency practitioners as soon as possible. An experienced insolvency practitioner will be able to assess your situation and help you choose the best course of action for your business.
Can you write off a Bounce Back Loan?
The short answer is no, Bounce Back Loans cannot be written off. When a business takes out a Bounce Back Loan it is entering into a legal agreement to repay the loan in full along with any interest that accrues. The terms and conditions of the loan are clear that the business is responsible for repaying the loan regardless of its financial circumstances.
However, there are some options available to businesses that are struggling to repay their Bounce Back Loan. One option is to apply for a repayment holiday through the PAYG scheme which allows the business to defer its repayments for up to six months. This can provide much-needed breathing space for businesses that are experiencing cash flow difficulties.
If a business is struggling to repay its Bounce Back Loan and insolvency is the only option, it is importance that they obtain expert advice from an licensed insolvency practitioner. They will evaluate the financial situation of the business and recommend the best available option for them. This could be anything from a Creditors Voluntary Liquidation or CVA – to more informal measures.
Company liquidation or administration are the only legal routes to releasing an insolvent business from its liability to a Bounce Back Loan. Please contact us here at Company Doctor if you are concerned that you are unable to repay your Bounce Back Loan.
Misuse of Bounce Back Loans
The UK government has introduced strict rules around the use of Bounce Back Loans to prevent misuse. If you are found to have misused your loan, you could face serious consequences, including legal action and criminal charges.
Here are some examples of what is considered misuse of Bounce Back Loans by companies and directors:
- Using the funds for personal expenses that are unrelated to the business.
- Failing to use the funds to support the business during the COVID-19 pandemic.
- Providing false information on the application to obtain a loan that the business is not entitled to such as exaggerating turnover.
- Using the funds to repay existing debt when you are already aware your business is insolvent or using it to pay dividends to shareholders when there is insufficient profit to justify the dividends.
- Failing to keep adequate records of how the bounce back loan was used.
- Using the loan to purchase luxury goods or fund lavish lifestyles.
- Failing to comply with the legal and regulatory requirements that govern the use of the loan.
- Using the loan funds for illegal activities or to fund criminal enterprises.
It’s important for businesses and directors to be aware of these examples of misuse and to ensure that they use the Bounce Back Loan funds responsibly and in accordance with the terms and conditions of the scheme. You could be held personally liable for the loan balance if evidence of serious misuse is identified.
Can You Be Held Personally Liable for a Bounce Back Loan?
One of the benefits of the Bounce Back Loan Scheme is that it is designed to help businesses and not individuals. The loans were guaranteed by the government and no personal guarantee was required. As such, the loan is intended to be repaid by the business, and not the individual borrower. Therefore, in most cases, the borrower will not be held personally liable for the loan.
However, there are some circumstances under which liability on the director(s) may arise. For example, if the borrower provided false or misleading information on their loan application, or used the loan for personal purposes, they may be held personally liable for the loan as noted above. If you think this may apply to you, contact us here at Company Doctor to discuss the implications and what options are available to you.
Additionally, if the borrower is a sole trader or a partner in a partnership, they may be held personally liable for the loan, as they are not considered separate legal entities from their business. In this instance, the individual may need to consider a form of personal insolvency if they are unable to pay back the bounce back loan such as through personal bankruptcy or an Individual Voluntary Arrangement (IVA).
The Bounce Back Loan Scheme has provided much-needed financial assistance to businesses in the UK during the COVID-19 pandemic. However, with economic uncertainty still prevalent, some businesses may find themselves struggling to repay their loans.
If you are a company director in this position, it’s important to explore all of your options and seek expert advice where necessary. Whether it’s taking advantage of the Pay As You Grow scheme, striking off your company, or negotiating with your lender, there are ways to manage your Bounce Back Loan repayments and avoid default.
Ultimately, the key to successfully managing your Bounce Back Loan is to be proactive and communicate with your lender. By taking action early and being transparent about your financial situation, you can increase your chances of finding a solution that works for both you and your lender.
Contact our team of insolvency experts today on 0113 237 9503 if you want some advice on your options if you are can’t repay your Bounce Back Loan.
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Can I pay a lump sum off my Bounce Back Loan?
Yes, you can pay a lump sum off your Bounce Back Loan. Most lenders allow borrowers to make additional repayments or pay off the loan in full before the end of the term. However, it’s important to check with your specific lender regarding their policies and any potential early repayment charges.
Does defaulting on a Bounce Back Loan affect your credit rating?
No, defaulting on a Bounce Back Loan does not directly impact your personal credit rating. These loans were designed with a 100% government guarantee, meaning the government covers the lender’s losses in case of default. However, it’s worth noting that defaulting on any loan can still have indirect consequences, such as damaging your relationship with the lender and potentially affecting your ability to obtain credit in the future.
What happens if I can’t pay my Bounce Back Loan as a sole trader?
If you’re unable to repay your Bounce Back Loan as a sole trader, the consequences may vary depending on your specific circumstances. Here are a few possibilities:
- Negotiating with the lender: It’s advisable to contact your lender as soon as possible to discuss your situation. Some lenders may be open to renegotiating the terms of your loan or offering alternative repayment arrangements.
- Impact on personal liability: As a sole trader, you’re personally liable for the debt. If you default on the loan and your lender takes legal action, they may pursue your personal assets to recover the outstanding amount.
- Insolvency options: If you’re facing severe financial difficulties, you may consider seeking professional advice from an insolvency practitioner. They can guide you through potential solutions like bankruptcy, individual voluntary arrangements (IVAs), or debt management plans, which could help manage your overall debt burden.