When Bounce Back Loans were introduced in March 2020 at the height of the coronavirus crisis, many companies seized on the opportunity to access the up to £50,000 offered on extremely favourable terms.
While this immediate injection of cash was a lifeline to many businesses at the time, with repayment terms on Bounce Back Loans typically up to ten years, companies are now faced with having to factor in monthly repayments towards this borrowing for the foreseeable future.
So what are your options when it comes to repaying your Bounce Back Loan and is there any flexibility offered? More importantly, what happens if your company simply does not have the money to repay its Bounce Back Loan at all?
Bounce Back Loans were originally offered over a six-year term, with no repayments due for the first 12 months. During the first year the government also promised to cover the interest levied on the loan during this time. However, with this initial payment holiday now over, many are faced with an unaffordable monthly cost.
One of the main reasons behind this is the uncertainty that was prevalent during the initial months of the pandemic. Very few people would have expected restrictions on trade to have lasted well over a year. While many may have been confident that their business could survive a temporary dip in revenue, sustaining a company over a year of restrictions has pushed some to breaking point.
The good news is that the government announced an amendment to the Bounce Back Loan scheme in order to help companies repay their loans. This has taken the form of the Pay As You Grow (PAYG) initiative which gives a company extra breathing space when it comes to making the monthly repayments on its Bounce Back Loan.
The PAYG scheme offers help in three main ways, depending on the level of support an individual company requires:
1. Companies can extend the initial 12-month payment holiday for an additional six months. Interest will continue to accrue during this time which will mean companies who take advantage of this option will pay more back over the life of the loan.
2. The term of the Bounce Back Loan can be extended from six years up to ten years. Spreading the repayments over a longer term will considerably reduce the monthly cost although this will cost more over the life of the loan.
3. 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.
Bounce Back Loans came with a raft of appealing benefits; one of these was that the government provided 100% security to the lending banks. This meant that no personal guarantee had to be given by the company directors or shareholders.
While this may not mean much while the loan is being repaid as planned, should the borrowing company become insolvent, this government security is extremely valuable. As the loan is backed by the government rather than by a director personal guarantee, should the company find itself in financial difficulties and subsequently enter an insolvent liquidation process, the responsibility for repaying the Bounce Back Loan will fall to the government rather than the company director.
In the event that your company cannot afford to repay the Bounce Back Loan, you will only be held personally responsible for repaying the money if it can be proven that you have misused the Bounce Back Loan funds.
Bounce Back Loans were not designed for any one purpose; instead, they were offered to companies to use in any way that would provide “an economic benefit” to the business. This could include, strengthening its cash flow position, purchasing new machinery, replenishing stock, or paying staff wages.
As long as the money was spent in a way which was directly related to the business and its operations, it is unlikely you will be accused of misusing the funds. However, if you used the money to fund personal purchases, you could find yourself personally liable for the outstanding amount if your company is not in a position to keep up with the agreed monthly repayments.
If you are in any doubt as to whether you may have spent the Bounce Back Loan funds in a way that they were not intended, you should seek the advice of a licensed insolvency practitioner as a matter of urgency. They will be able to assess the position you find yourself in, and advice whether personal liability for the Bounce Back Loan is something you need to be concerned about.
Just because you are currently unable to pay your Bounce Back Loan monthly repayments, does not mean that the company is beyond rescue. There are a number of business rescue and recovery strategies that could help strengthen the cash position of your company, freeing up vital funds you can direct towards paying back your Bounce Back Loan.
For those owing money to HMRC, a Time to Pay (TTP) arrangement may be able to be negotiated. A TTP arrangement functions as a payment plan between your company and HMRC, where the company promises to pay all the taxes they owe, and HMRC gives them additional time to do this. TTPs typically run for up to 12 months and must be set at a level which is affordable and maintainable for the business.
Alternatively, a formal insolvency process may be better suited if debts are more sizable and owed to a variety of creditors. If your company is experiencing threats of legal action, placing the company into administration could provide the time and breathing space needed while a way forward is planned. For those with mounting debts, a Company Voluntary Arrangement (CVA) allows you to consolidate your liabilities into one legally-binding payment plan which will see all included debts cleared within a determined period which is typically 3-5 years.
Both administration and CVAs can only be entered into under the guidance of a licensed insolvency practitioner. If you are experiencing problems paying back your Bounce Back Loan, or are struggling with other unmanageable debts, an insolvency practitioner should be your first port of call.
The simple answer is yes, you can close a business with an outstanding Bounce Back Loan. When it comes to liquidation, a Bounce Back Loan is not treated any differently than any other unsecured loan your business may have. this means that if the company becomes insolvent and needs to be wound up, the remaining balance of the Bounce Back Loan will be included in the process.
The voluntary liquidation of an insolvent company by way of a Creditors’ Voluntary Liquidation – or CVL - is handled by a licensed insolvency practitioner. They have a number of duties during the process, and one of these is to identify company assets before distributing the proceeds of these to outstanding creditors.
In the case of an insolvent company, the value of creditors will outweigh the value of available assets. As a result, any debt which cannot be repaid will be written off when the company is formally and officially closed at Companies House.
Unless this borrowing has been secured with a director’s personal guarantee, the insolvent company’s directors/shareholders will not be asked or expected to repay any shortfall. As previously stated, Bounce Back Loans did not require a personal guarantee to be signed.
If your company has missed a Bounce Back Loan payment, or you feel you may be in danger of doing so in the future, seeking expert help and advice should be a priority. There are a number of ways a financially distressed company can be turned around, however, taking this action at an early stage is vital in increasing the changes of success.
If you are worried about how your company is going to repay its Bounce Back Loan, Begbies Traynor can help. We have over 100 licensed insolvency practitioners working across offices the length and breadth of the UK. We offer free no-obligation and completely confidential consultations to all company directors. Call our expert team today for help and advice on your Bounce Back Loan on 0800 063 9221.
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