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The Complete Guide to Bounce Back Loans: Understanding your options and where to go for help
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Understanding the Bounce Back Loan Scheme
As the country in spring 2020, the government introduced a series of measures to help support businesses and their owners as they attempted to navigate this unprecedented situation.
One of these initiatives was the Bounce Back Loan scheme. Introduced in March 2020, the scheme offered loans of up to £50,000 to all small and medium sized businesses, and came with a raft of attractive features.
The loans were offered with a low rate of interest which was fixed at just 2.5% for the entire 6-year term, no repayments needed to be made for the first 12 months, all interest and fees for the first year were covered by the government, and, perhaps most importantly, the government provided 100% security to the banks in the event of non-repayment. This meant no personal guarantee had to be provided by the borrowing company’s directors or shareholders.
The Bounce Back Loan scheme is now closed to new applicants, however, for some the problems are only just beginning.
While the vast majority of companies took out these loans in good faith, with the full intention to repay as promised, unfortunately no one at that early stage of the pandemic could have predicted how long, nor how deep, the associated restrictions on business and trading operations would be.
Many will have taken out a Bounce Back Loan in spring 2020, fully expecting life – and, therefore, their business – to have returned to ‘normal’ by the time the first payment on the loan was due. The reality, however, is that well over 12 months of limited business activity due to ever-changing national and local restrictions, has resulted in acute cash flow issues which, coupled with an uncertain future, has left many companies simply unable to meet the monthly repayments which are now being demanded.
If you are struggling to repay your Bounce Back Loan, you are not alone. More than two million businesses took out Bounce Back Loans worth £47.36bn, with estimates suggesting 40–50% of these borrowers are set to experience problems with repaying their loan.
While your situation may not be uncommon, it is still vital that you seek expert help and advice once you become aware of any problems you will have in repaying the money owed on your Bounce Back Loan. Real Business Rescue is here to help. Our team of restructuring, refinancing and business turnaround experts can independently assess your situation, and explain the options if you need Bounce Back Loan help.
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The Pay As You Grow scheme was introduced in the Winter Economy Plan in October 2020 in a response to concerns that many companies were likely to encounter problems when the time came to start repaying their Bounce Back Loans. The PAYG scheme offers three solutions to ease the immediate financial burden facing companies up and down the country:
- You can extend the initial 12-month payment holiday for an additional six months. This can be taken immediately following the first year-long payment holiday, or at any other time during the duration of the loan. You should note that interest will continue to accrue during this time, meaning you will pay more back over the life of the loan by opting for this additional payment holiday.
- You can increase the term of the Bounce Back Loan from six years up to ten years. Spreading the repayments over a longer term will considerably reduce the monthly cost – in fact this will almost halve – although over the length of the loan you will pay back more in interest overall.
- Interest-only payments can be made for six months. This will mean companies will save money on repayments for these months while ensuring no additional interest will be charged
As per the PAYG scheme, you can contact your bank and discuss how one – or even all – of these options may help when it comes to the repayment of your Bounce Back Loan. While your bank should be happy to let you take advantage of the repayment options offered by the PAYG scheme, you should not expect them to exercise any further leniency. It is unlikely that your bank will enter into further negotiations when it comes to the repayment of your Bounce Back Loan.
If after investigating your options – including the PAYG scheme – for repaying your Bounce Back Loan, you still feel you are in a position where you are unable to repay, you must seek expert help and advice as a matter of urgency. The sooner professional help is sought, the more options will be open to you and the greater the chance there is of saving your company.
As soon as you fall into arrears with your Bounce Back Loan you should expect your bank to take immediate action to recover the owed amount. This will typically take the form of a letter or phone call asking you to bring your account up to date. If you fail to do this, and your arrears continue to grow, recovery action will escalate. Left alone, this may result in your company being forced into compulsory liquidation by order of the courts.
If you fear you may fall into arrears with your Bounce Back Loan – or if you have already missed payments – seeking expert insolvency advice can help you understand your options. The experts at Real Business Rescue are here to help.
One of the main benefits of a Bounce Back Loan was that directors were not required to provide a personal guarantee to secure the borrowing. Instead, the government provided security to the lending banks for 100% of the borrowing taken out under the Bounce Back Loan scheme.
In simple terms, this means that in the event of the company being unable to repay their Bounce Back Loan, the government will step in and cover the shortfall so that the lending bank does not have to suffer the loss. In effect the Bounce Back Loan will be written off under these circumstances.
While this assurance offered by the government provides valuable security in the event of serious financial difficulties, the ultimate responsibility for repaying the loan remains with the company.
It is not simply enough to say that your company cannot repay the loan for the government guarantee to kick in. In fact, the government will only repay the outstanding balance to the bank should your company enter a formal insolvent liquidation process such as a Creditors’ Voluntary Liquidation (CVL) or be forced into compulsory liquidation by order of the courts.
While your company remains an active and legal entity, it is wholly responsible for repaying the full amount of the Bounce Back Loan.
Due to the government providing 100% security to the lending banks, as a director, you are not personally liable for repaying the outstanding balance on your Bounce Back Loan should your company enter liquidation.
There is an exception to this rule, however, and this involves the misuse of Bounce Back Loan funds. When Bounce Back Loans were introduced, it was accepted that different companies were experiencing different problems and, therefore, the remit of what a Bounce Back Loan could be used for was wide-ranging. The only restriction was that the loan was to be used in a way which would benefit the company, rather than the company director as an individual.
Some companies used the funds to modify their operations to allow them to continue to trade, others paid staff wages and purchased stock, while some used the money to repay debts and cover other outgoings. All these are valid ways of spending the loan as they all served to provide a benefit for the company and improve its ongoing viability.
If, however, instead of using the Bounce Back Loan to directly help your business operations, you have spent the money on personal purchases, you may be seen to have misused the funds. This could have serious repercussions in the event of you being unable to repay the money you borrowed.
If your company becomes insolvent and has to be closed with a Bounce Back Loan in place, you could be held personally responsible for repaying the outstanding balance if you have misused the funds. If you believe you may be in this situation, make it a priority to speak to the experts at Real Business Rescue. We can help determine whether the funds have indeed been misused, and if so, plan a route forward which satisfies the bank and also takes into account your personal position and ability to repay.
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If you are in a position where you are not able to repay your Bounce Back Loan and you fear your company is insolvent, it may be the case that your company has to be closed in order to protect any further losses to creditors. This can be done through a process known as liquidation.
Liquidation may be an option if your company cannot afford to repay its Bounce Back Loan; however, this is a serious step to take and it is important you understand what liquidation will mean for you, your company, and your creditors before going ahead.
Liquidation brings about the end of a company which is either insolvent, or has outlived its useful life. Once a company is dissolved, it ceases to exist in the eyes of the law and any employees will be made redundant, while any outstanding debts which cannot be repaid from company assets will be written off unless secured by a director’s personal guarantee.
While Bounce Back Loans did not require a personal guarantee to be given, your company may have other borrowing which is secured in this way. If you have provided a personal guarantee for any other form of company borrowing, this guarantee will crystalise upon the company entering liquidation, and you will become personally liable for repaying this debt using your own funds.
In many instances of company insolvency, however, liquidation is the best course of action. As a director of an insolvent company, you have a number of legal responsibilities – one of these is ensuring that once you know your company to be insolvent, you must place creditor interests above those of yourself and your fellow shareholders.
By seeking the advice of a licensed insolvency practitioner at the first signs of insolvency, you are demonstrating your desire to adhere to your duties. When a company enters liquidation, its directors will be subject to an investigation which will review director conduct in the time leading up to the liquidation. This is to highlight any wrongful trading which may have taken place, such as failing to protect creditors’ interests when the company was knowingly insolvent.
In short, the answer is no. Dissolving a company – sometimes known as striking off – is an informal company closure option designed for those companies with neither assets nor any outstanding liabilities or debts. Strike off is achieved by submitting a DS01 form which requests that your company’s name is removed from the register held at Companies House. If no objections are received, the company will be dissolved and will cease to exist as a legal entity. No further action will be taken against the directors and no Insolvency Service investigation will be needed. Companies which have been dissolved can be reinstated to the register up to 20 years after being struck off.
However, if you have a Bounce Back Loan that you cannot afford to repay, your company is classed as insolvent, and you will not be able to close your company using the dissolution or strike off procedure. Instead, your company must be closed using a formal insolvency process such as a CVL.
While there is nothing to technically stop the director of an insolvent company applying to have their company struck off the Companies House register using the DS01 form, you should expect your application to be objected to if there is a Bounce Back Loan outstanding.
While companies are faced with the prospect of Bounce Back Loans they cannot repay, the government likewise is also faced with Bounce Back Loan problems of their own. With billions of pounds still outstanding on Bounce Back Loans, the government could potentially be liable for repaying this staggering sum to the lending banks should borrowing companies be unable to do so. As a result, the government is making it as difficult as possible for companies with a Bounce Back Loan to be closed down using the strike off procedure.
They are urging all banks to submit a formal objection to any strike off application made by a company with an outstanding Bounce Back Loan. They are also rushing through legislation which will mean all companies which have been closed down via strike off will be subject to investigation by the Insolvency Service if there is an outstanding Bounce Back Loan in place.
If you have a Bounce Back Loan that you are not in a position to be able to repay, therefore, you will need to consider alternative options which do not involve striking the business off.
Being unable to keep up with the repayments on your Bounce Back Loan could hint at deeper financial problems within your company. If this is the case, there are a range of restructuring and refinancing options that could help turn the situation around.
A Company Voluntary Arrangement (CVA) functions as a legally-binding payment plan which is entered into between a financially distressed company and its creditors. A CVA typically lasts for between 3–5 years, during which time the company will make a series of pre-agreed affordable and sustainable monthly repayments towards their outstanding debts, facilitated by an insolvency practitioner who will act as Supervisor for the length of the agreement. Depending on what the company can afford to repay, some debt may be written off as part of the CVA.
For a business which requires extensive restructuring and/or streamlining, placing the company into administration allows for this process to be done free from threats of legal action by disgruntled creditors. A moratorium is placed around the company while it is in administration, meaning it cannot be forcibly wound up during this time. The appointed administrators will work towards realising a better outcome for creditors than if the company was simply liquidated without first going into administration. Viable elements of the business may be able to be rescued, allowing trade to continue and jobs to be saved.
Alternatively, it may be the case that your company needs an injection of cash, or a solution to bring more stability and certainty, to allow it to return to profitability. This may take the form of a traditional bank loan, or a more niche form of borrowing such as asset or invoice financing. The right option for you will depend on what the funds will be used for, how much you need to borrow, and how much your company can afford to repay. You may also wish to consider refinancing existing borrowing to determine whether you are able to save money by shifting this to a cheaper interest rate. Although it is highly unlikely you will be able to find more competitive terms than your Bounce Back Loan offers, you may be able to make savings on older loans or credit cards your company is still repaying.
While taking out additional financing could be the ideal solution, you should be aware that piling further borrowing onto an already indebted company could be a recipe for disaster. If you are already struggling to keep up with the monthly repayments on your Bounce Back Loan, you need to be honest with yourself about whether you will be able to afford to service any additional borrowing.
At Real Business Rescue, we offer all limited company directors a free Bounce Back Loan assessment. This will be undertaken by a licensed insolvency practitioner who will take an impartial and independent view of your company, its finances, and its likely future viability, to determine your current position.
We can advise on how the Pay As You Grow scheme could help you in the short term, while offering advice and guidance on creating more long-term financial stability to allow you to confidently keep up with the repayments on your Bounce Back Loan.
If you are worried you may have misused Bounce Back Loan funds, we can help to determine whether this is indeed the case, and if so, what this would mean for you in the event of your company having to enter an insolvent liquidation process.
We understand that seeking professional company insolvency advice is a difficult step to take; however, left alone, this type of situation will only escalate. Rest assured that we speak to thousands of company directors just like you every year, and there is nothing we have not seen before. No matter how bad you feel your situation is, there is a solution out there and the sooner you take advice the more options will be open to you.
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Are Bounce Back Loans personally guaranteed?
No. The government offered banks 100% security for each and every Bounce Back Loan that was given out under the scheme. This means that company directors were not required to provide a personal guarantee and as long as the funds have been correctly used, directors will not face personal liability in the event of their company not being able to repay the money borrowed.
Can Bounce Back Loans be used to pay wages, buy company property, or pay company taxes?
Quite simply, yes. Bounce Back Loans can be used for any purpose which provides a direct benefit to the company. For some this will be covering overheads or outstanding debts, while other companies may choose to use the loan to invest in company assets or property. The only requirement is that the loan is for business use rather than personal use. If you have used the Bounce Back Loan funds for personal use, you may be at risk of personal liability should your company be unable to repay the loan in full.
Can a Bounce Back Loan be paid over 10 years?
Thanks to the Pay As You Grow (PAYG) scheme, Bounce Back Loans can be repaid over 10 years. Bounce Back Loans were originally offered under 6-year repayment terms; however, the PAYG amendment allowed companies to extend this. By extending your Bounce Back Loan to be repaid over 10 years will see your monthly repayments nearly halve, although you will pay back considerably more over the life of the loan.
When will I have to repay my Bounce Back Loan?
The first 12 months after taking out the Bounce Back Loan are free from monthly repayments, and all interest and fees during this time will be covered by the government. Your monthly repayments will begin at month 13, and will continue for the life of the loan which is set at 6 years. The PAYG scheme, however, allows you to defer these monthly repayments for an additional 6 months, as well as giving you the opportunity to extend the total loan term to 10 years.
What happens if I cannot repay my Bounce Back Loan?
If you cannot repay your Bounce Back Loan, you need to take swift professional advice. Your bank will be able to help you take advantage of the PAYG scheme which could provide some short-term relief while your company’s finances improve. However, if you feel the problems you are experiencing are more deep-rooted, you may need to seek the advice of a licensed insolvency practitioner who will be able to talk you through your options and help you understand the situation your company has found itself in.
For further information or advice on your Bounce Back Loan, please contact the Real Business Rescue helpline.
Further Reading on The Complete Guide to Bounce Back Loans for Directors
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