What is a Bounce Back Loan?
On March 1st 2020, the Bounce Back Loan Scheme (BBLS) was introduced to provide support for small and medium-sized businesses through the difficulties of the Coronavirus pandemic. This enabled independent businesses to borrow between £2,000 and £50,000 at a low interest rate with a government-backed guarantee.
Bounce Back Loans have to be repaid however, businesses can choose to repay them over a period of 6 or 10 years, offering companies the chance to invest in large purchases that have the potential to bring in economic growth. For instance, a company could invest in a new vehicle that would further its trading reach or allow for easier transport of goods, or take on new staff or a larger/better-equipped workspace to promote productivity. These commodities must be for the benefit of the business, however, and are not intended for personal use.
What are Bounce Back Loans for?
A large number of companies were hit hard by the onset of the Covid-19 outbreak, which disrupted businesses around the globe, causing a mass loss of revenue. In response, the BBLS was set up to help keep British companies to continue to trade during this challenging time. To qualify for a Bounce Back Loan businesses must have been based in the UK and been trading since before the scheme launched, on March 1st 2020.
The scheme ran for just over a year, coming to an end on March 31st 2021, when lockdown restrictions began to lift and many elements of post-pandemic life began to return to normal. During this time, over 1.5 million businesses took advantage of the Bounce Back Loan Scheme.
The BBLS was particularly appealing as it offered companies the means to continue trading despite losses caused by the pandemic, without the pressure of having to repay the loan for the first twelve months. Additionally, the BBLS offered a 2.5% interest rate which was covered by the government for the first year, setting a reasonable limit as regards how much money companies would have to pay back.
Repaying a Bounce Back Loan
Unfortunately, even as life continues to creep back to normalcy, Covid-19 infection rates are still impacting businesses all over the world. This, combined with the challenges of the cost of living and cost of energy crises, has resulted in a great number of companies continuing to struggle or having to face closure. As stated previously, Bounce Back Loans must be repaid, but there are options to make repayments easier for companies that are facing financial difficulty.
For example, companies can use Pay As You Grow (PAYG) which allows them to:
· Request an extension on their loan term, increasing it from 6 years to 10
· Reduce monthly payments for 6 months by paying interest only
· Take a repayment holiday for up to 6 months
PAYG options will be made available to businesses approximately three months before the first loan repayment is due, and will not affect your credit rating. Alternatively, companies can contact their lender to express concerns about repaying the bounce back loan and seek advice. You can read more about struggling to repay bounce back loans by clicking on the link.
Bounce Back Loans and Insolvency
If a director intends to dissolve or strike off their company with an outstanding Bounce Bank Loan, the bank will object. Consequently, the company will likely have to seek an alternative way to proceed such as a Company Voluntary Arrangement (CVA), or Creditors Voluntary Liquidation (CVL).
In a CVA, the Bounce Back Loan would be provable therefore the lender would be included in the arrangement as a creditor that the company would pay as part of the arrangement. Likewise, in a CVL, the lender would be able to submit a proof of debt, so that if a dividend were to become available, the lender would receive one.
If a company is found to have misused a Bounce Back Loan, action may be taken against both the business and the director. This could include knowingly giving falsified information during the application process, applying for a loan after your company had ceased trading, inflating your company’s turnover in order to claim the maximum £50,000, dissolving your company to avoid repaying the Bounce Back Loan, or using the loan in order to fund personal spending (for instance, paying for holidays, home improvements, personal vehicles or gambling). In some circumstances where a director had no other source of income and used the BBLS to pay themselves a reasonable living wage, the situation will be judged on a case by case basis.
The inappropriate use of a bounce back loan could result in:
· Court order/action
· Being disqualified as a director
· Your company being wound up
· A Compensation Order being made against the director
· Criminal prosecution and prison time
You can learn more about the first person to be prosecuted and sentenced for abusing the BBLS here.
It is our understanding that the Insolvency Service’s stand point on the issue of abuse of the Bounce Back Loan Scheme is to seek disqualification of the directors involved, and also to seek a Compensation Order against them personally, for the sums that have been misappropriated.
It is also our understanding that if the director has entered into a repayment agreement with the Liquidator or Administrator, then in those circumstances the Insolvency Service will not seek a Compensation Order against them. The advantage of this is that a Compensation Order is payable within 28 days, whereas if an agreement is entered into with the Liquidator or Administrator, it may be possible to spread the repayment of the sums owed over a longer period. It follows that discussing the matter with a Licensed Insolvency Practitioner will be extremely important.
If you would like to discuss any of the issues raised herein, please do not hesitate to contact Purnells at email@example.com or on 01326 340579.