Due to the outbreak of COVID-19 the Business Bounce Back Loan was launched by the chancellor Rishi Sunak to provide much needed financial support to businesses struggling at this time. Is this bounce back loans news article, we explore what happens if you genuinely cannot pay back the loan for various reasons.
What if I don’t pay back the bounce back loan?
Now, we’re going to interpret the word don’t in the context that there is little or no intent to pay back the bounce back loan, both in terms of the interest and principal, or just one or the other. Where the loan cannot be paid back, is dealt with later on in this article.
The first and perhaps obvious point of clarity here, is that this is a loan and not a gift. It has to be repaid in accordance with the terms and conditions of the loan agreement you will have signed.
Simply not paying back the loan is not really an option. If you don’t make repayments when they fall due, then it highly probable your lender will pursue your business for repayments or worse still, further legal action.
Burying your head in the sand or ignoring demands is likely to land you in even more chaos, stress and ramped up pressure from your lender.
What if I close my company before I pay back the bounce back loan?
Let’s look at an example:
Your company took out a bounce back loan of £50,000 on the 1st June 2020, on a 6 year term. By the 31st May 2021, the 12 month business interruption interest free period will have elapsed.
So you decide your company is no longer viable and want to close it down.
Now, remember that the loan lender is a creditor, and quite simply you cannot close your company down in a solvent liquidation, until all creditors have been satisfactorily paid, or they have formally agreed to write off the debt.
A solvent company dissolution is a process, and part of that process is that creditors are given the opportunity to come forward and oppose the solvent liquidation if their debt has not been paid, or satisfactorily dealt with.
Simply filling in a DS01 form to companies house to strike off your company will not cut the mustard.
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What if I am genuinely struggling or cannot pay back the BBL?
If this is the case, then we strongly suggest you approach your lender as soon as possible and discuss matters with them. A pro-active approach will be looked upon favourably and they will probably have protocols and a support team to help and co-operate with you. If you try to ignore the issue or bury your head in the sand, then this will probably lead to more chaos, stress and no doubt adverse outcomes for you.
The good bounce back loan news is that the Chancellor announced new Pay As You Grow measures for borrowers who have accessed the Bounce Back Loan, and to help those who may be struggling. The measures will provide borrowers with the option to:
- Extend the length of the loan from six years to ten.
Make interest-only payments for six months, with the option to use this up to three times throughout the loan
- Once six payments have been made, request a six-month repayment holiday.
- Businesses will be able to use these options either individually or in combination with each other, as well as having the option to fully repay their loan early and will face no early repayment charges for doing so. And these will be standardised options available to all borrowers.
And don’t forget lenders are not permitted to require personal guarantees for the Bounce Back Loan Scheme. For sole traders or small partnerships, who often risk their personal assets when borrowing, the terms of the Bounce Back Loan Scheme means no recovery action can be taken over a principal private residence or a primary personal vehicle. However, other personal assets could be at risk.
The main aim of pay as you grow is to allow your business enough time to recover and grow revenues and profit so it can start to pay down the loan.
In the worse case scenario, if you have exhausted all attempts to recover your business or generate sufficient revenue and profits, then we strongly suggest you speak to your lender at the earliest junction.
What happens if I spend the money personally?
This is a very common question, and in our professional view, we can provide guidance.
More than likely, you will have completed an application form and signed a loan agreement. One of the clauses in the agreement is most probably written as follows:
I/we undertake to use the credit granted on the basis of this agreement only to provide economic benefit to my/our business. I/we also confirm that the bounce back loan will be used wholly for business purposes and not personal purposes.
And this applies whether you are a company director/shareholder or a sole trader.
So if you have or intend to you use the money for lets say personal remuneration or drawings, that, at the moment in itself is not an issue. There’s no one standing over you or monitoring you and your business as such.
The difficulty is likely to arise if your business struggles to generate sufficient revenues, profits and cash flow and perhaps forces you to call it a day and close down your company. As a result, if you subsequently are unable to repay the loan whether in part or full, then your company could be classified as insolvent. In other words, it is unable to pay its debts as they become due, and your company liabilities exceed its assets.
An insolvent dissolution is a completely different animal to a solvent dissolution. With an insolvent dissolution, your conduct as a director will be brought into question, and if it is suspected you have wrongfully traded, fraudulently traded or your conduct has been unfit, then you could be investigated and face disqualification from being a director for up to 15 years.
On a positive note, if you genuinely had to remunerate yourself reasonably to keep your business going as you are no doubt a crucial part of your business, then in our professional opinion this should not be cause for concern, so long as you can demonstrate how this action was necessary in an attempt to generate “economic benefit” to your business.
We are pretty sure any lender, government agent or liquidators recognise that in this pandemic, not all businesses will survive and perhaps thrive, there will unfortunately be casualties. The acid test is the business owner’s intent and conduct during this time.