What Happens If I Default on a Bounce Back Loan?

Understanding Bounce Back Loan Defaults

Bounce Back Loans were introduced at a time when many businesses up and down the country were faced with substantially curtailing their trade levels – or even stopping trading altogether – as a result of various local and national lockdowns.

These loans represented a lifeline to many, and due to the unprecedented circumstances, a 12-month grace period was given as standard, meaning that no repayments towards the loan would need to be made during the first year. However, for the vast majority of companies, this initial payment holiday has now expired and regular monthly repayments towards the Bounce Back Loan are now due.

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What is a Bounce Back Loan default?

While many companies took out a Bounce Back Loan with the full intention of being able to make the repayments at this time, some are finding their company’s road to recovery from the Covid-19 pandemic not being as smooth or as quick as expected.

This is leading to some companies defaulting on their Bounce Back Loans. Defaults happen when you fail to make a scheduled monthly repayment towards your Bounce Back Loan and the account falls into arrears.

Missing a repayment towards your Bounce Back Loan should be taken extremely seriously. Although Bounce Back Loans are secured by the government, the responsibility for making the monthly repayments lie solely with your company. Ignoring defaults on your loan will not make the problem disappear, in fact, this course of action is likely to make the situation much worse.

What can you do about Bounce Back Loan defaults?

If you have defaulted on your Bounce Back Loan, your first port of call should be to get in contact with your lender and explain the situation. You will not be the only one experiencing problems in repaying, and you may be able to negotiate a mutually agreeable solution which allows you to bring your defaults up to date and help you maintain your account going forwards.

This may be achieved by taking advantage of the Pay As You Grow scheme, which gives you the option of taking a short payment holiday from your Bounce Back Loan, extending the length of your loan, or making reduced payments by temporarily switching the loan to an interest-only basis. This may give you the breathing space needed for your trading and cash flow position to improve.

For some, however, more than a temporary fix will be needed to deal with outstanding Bounce Back Loan defaults and arrears.

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What if I cannot clear my Bounce Back Loan arrears?

Defaulting on your Bounce Back Loan could point towards wider financial problems within your company. Cash flow issues, such as not being able to make debt repayments and other outgoings as and when they fall due, can rapidly escalate taking your company to the brink of insolvency extremely quickly.

If you have defaulted on your Bounce Back Loan and are unsure how you are going to be able to afford to clear your arrears and continuing making the repayments towards the loan in full and on time, you may need to consider a formal insolvency process.

Restructuring a company with a Bounce Back Loan default

Defaulting on your Bounce Back Loan does not mean the company cannot get itself back on a solid financial footing. There are a range of business rescue and recovery solutions designed to help companies navigate periods of financial and operational distress. If you believe your business has a good chance of a successful future if only it could overcome its current financial problems, a licensed insolvency practitioner will be able to help you explore the options open to you and your company. 

This may involve a Company Voluntary Arrangement (CVA) which functions as a formal payment plan entered into by a company and its creditors. A CVA can include a number of borrowings that you have fallen behind on or feel you may soon struggle to keep up with, not just your Bounce Back Loan. A CVA aims to reduce your monthly repayments to creditors while allowing trade to continue.

A proposal will be put together by your appointed licensed insolvency practitioner and presented to your creditors. They will then vote on whether to accept the terms of the proposal. Once accepted by at least 75% (by value) of creditors, the CVA becomes legally binding on all parties giving you more stability and certainty for the duration of the arrangement which is typically 3-5 years.

Alternatively, you could consider placing the company into administration if creditors are threatening legal action against your business. Not only will administration place a legal ringfence around your company, it also provides the opportunity to restructure the existing finances and operations of the business allowing for the viable elements of the company to be rescued.

Can I close a company after defaulting on a Bounce Back Loan?

In some instances of Bounce Back Loan defaults, the company will unfortunately be beyond the point of rescue. When a company has deep-rooted financial problems which are unlikely to improve, it may be best for all concerned to look at ways of winding up the business.

Closing an insolvent business can be achieved through a director-initiated process known as a Creditors’ Voluntary Liquidation (CVL). This is administered by a licensed insolvency practitioner who will be responsible for identifying the assets of the business, distributing the proceeds to creditors, before dissolving the company at Companies House. At this point the company will cease to exist as a legal entity and any unpayable debt (which has not been secured by a Personal Guarantee) will be written off. This will include any outstanding amount left on your Bounce Back Loan plus any fees or penalties which have been charged as a result of you defaulting.

How Real Business Rescue can help

If you have defaulted on your Bounce Back Loan and are considering your next move, the experts at Real Business Rescue are here to help you understand your options. Call our director helpline on 0808 253 5271 to arrange an appointment with a licensed insolvency practitioner, either over the phone or in person at one of our 100+ offices.