Thousands of SMEs in the UK will be starting to repay their Bounce Back Loans as the year-long holiday on repayments start to tail off. But if you’ve taken a Bounce Back Loan to support your business during the pandemic and are now realising you can’t pay it back, you might be starting to worry about the consequences and what your available options are.
Our corporate recovery and insolvency expert, Chris Love, is here to help and examines the options and implications for your company and the directors.
What is a Bounce Back Loan?
The Bounce Back Loan Scheme (BBLS) was set up by the government during the pandemic to support small and medium-sized businesses that were experiencing financial difficulties by providing access to finance more quickly.
Businesses were able to borrow up to 25% of their turnover to a maximum of £50,000. Unlike most bank loans there is no personal guarantee required from a director. For the first 12 months, they were interest-free and no repayments were required. For the remainder of the 6-year term, interest is charged at 2.5%.
What if I can’t pay my Bounce Back Loan back?
This scheme, along with others such as furlough, VAT and rent deferrals were set up to help support businesses to survive through the unprecedented times of the pandemic. Unfortunately, some businesses won’t be in a position to repay debts, and some may not survive.
Although the capital and interest are guaranteed by the government, in the event of missed repayments and defaulting on the loan the bank will pursue enforcement action against the company under their normal processes. This may include instructing a debt collection agency, issuing county court proceedings or presenting a winding up petition.
If your business is unable to repay any loans or creditors when payment is due, the business will be insolvent, and you may be at risk personally if you breach your directors’ duties. When a company becomes insolvent the directors’ primary duty is the interest of its creditors. As a director, you should not take any steps which would prejudice creditors, for example continuing to incur debts which would mean new liabilities have been created and the overall level of creditors increases.
It’s wise to seek advice from an insolvency practitioner as soon as possible if you think you may not be able to repay the loan now or may have problems repaying in the future. The sooner you get expert advice, the stronger your chances are of recovery – getting advice from an insolvency practitioner doesn’t always lead to an insolvency procedure, there are other options which can be explored in the early stages.
Option 1: Pay-as-you-grow
In February 2021, the government provided greater flexibility to businesses in repaying their loans. They offered the option to extend the loan term up to 10 years under its “pay-as-you-grow” initiative. This also allowed businesses up to three 6-month periods of interest-only repayments during the loan tenure, or the ability to request a single 6-month payment holiday.
Option 2: Company voluntary agreement (CVA)
A CVA is a legally binding agreement between a company and its creditors, in which creditors are paid part or all of the debt over a set length of time and the company is allowed to continue trading. An insolvency practitioner is appointed to oversee the CVA, ensuring the company follows the terms of the agreement and that the agreed amounts are paid to the creditors.
This means you can settle the Bounce Back Loan, along with any other debts, in realistic amounts in an agreed time frame.
Option 3: Administration
Administration can save and rehabilitate insolvent but potentially viable businesses. An insolvency practitioner is appointed to manage the company’s affairs in the best interests of all creditors.
This may allow the company can continue to trade in administration or may mean a sale of the business and assets.
Option 4: Liquidation and Winding Up
Liquidation and winding up is a last resort, it is the formal process of bringing a company to an end. It involves selling off company assets to pay creditors and closing the company.
In this case, the Bounce Back Loan will be an unsecured debt.
Since no personal guarantees were required for the BBL, unless there has been a breach of directors’ duties, the director will not be personally liable for the debt.
Speaking with an insolvency professional as soon as you’re aware there is a problem will give your company the strongest chance of recovery. If you need any support or advice, please contact me directly at firstname.lastname@example.org.