Kevin Mcleoud Insolvency Practitioner
Written By Kevin McLeod
Licensed Insolvency Practitioner
January 26th, 2022

Lenders are now collecting monthly repayments for Bounce Back Loans, which were a core part of the government’s Covid-19 support. But what happens if you are finding these impossible to meet?

Bounce Back Loan Default

Bounce  Back Loans were provided by a range of lenders for between £2,000 and £50,000 – up to a maximum of 25% of the business turnover, Around 55% of UK SMEs took out Bounce Back Loans, which were launched in May 2020, with the scheme closing on 31 March 2021. 

Acceptance was generally easier with this loan scheme than with standard commercial loans because there was a 100% government-backed guarantee for the lender. They also came with no need for a personal guarantee, a highly attractive interest rate of 2.5%, and the first 12 months were interest-free, so it is understandable why so many chose to borrow. These loans provided firms with a lifeline when trading was hugely disrupted because of the pandemic.

The problem is, the pandemic is still here, many businesses are still experiencing trading uncertainties and there is no clear end in sight. If you are struggling to deal with creditors and loan default, then you won’t be alone.

When Will my Lender Contact me if I Default on a Bounce Back Loan?

If you have defaulted on a Bounce Back Loan repayment, you can expect your lender to contact you a few days after. Each lender will have their own processes in place to collect a debt and in how they deal with borrowers. However if there were insufficient funds and the payment did not clear via direct debit, this counts as a default. You will therefore be asked to get in contact to discuss the situation. You may also be advised about Pay as You Grow options. 

What is Pay as You Grow – how does it help with Bounce Back Loan repayments?

Pay as You Grow was launched by the government to all companies to have longer to repay their loans – [1]BRITISH BUSINESS BANK “Pay as You Grow” . The pandemic is still here and businesses continue to suffer disruption, therefore some require more time to recover. 

You should have been informed about Pay as You Grow three months before your first Bounce Back Loan repayment was due,  however, you may not have seemed necessary at the time, or you may have missed the details. 

Pay as You Grow allows borrowers to:

·    request an extension of their loan term to 10 years from six years, at the same fixed interest rate of 2.5%

·     reduce their monthly repayments for six months by paying interest only – this option is available up to three times during the term of their Bounce Back Loan

·     take a repayment holiday for up to six months – this option is available once during the term of their Bounce Back Loan

The options can be used individually or in combination with each other. Using Pay as You Grow may provide valuable breathing space, but it will also increase the length of your loan and mean you pay more interest overall. 

What if I Still Can’t Make Repayments With Pay as You Grow?

Perhaps you have found that even after the repayment holiday and interest-only options have been utilised, that it remains impossible to manage. If your business is experiencing more severe financial problems, you may also be being pursued by a number of creditors including HMRC, and so be facing a worsening and worrying situation with your loan debts. 

You should go back to the lender as soon as possible – ignoring the problem will only make matters worse.  They may be able to give you some additional time – much will depend on how much you owe overall and your company’s prospects. It could be that your underlying business model is sound, but problems stem from late payments that are due to be resolved. If you can prove evidence that the current issues are temporary, then the Bounce Back Lender may provide some extra flexibility. 

Will the Bounce Back Loan Lender Take Me to Court?

A Bounce Back Loan is the same as any other unsecured loan and so the lender will look to recoup the money by a range of means. Although the government guaranteed the amount of the loan, banks are still required to make considerable efforts before they will be recompensed by the state. Banks have debt recovery teams in place who will be in touch with you on a regular basis. 

So, although short-term fixes may be possible, if you continue to miss payments, then action will be ramped up. This may include contact from debt collectors and you may also be threatened with a County Court Judgement, which may then entail bailiffs seizing company goods as a means of debt repayment. 

Should I Liquidate if I Can’t Repay a Bounce Back Loan?

This very much depends on the severity of your company’s financial problems. If you are insolvent or are close to this, you should take advice immediately from a licensed insolvency practitioner.

They will provide you with objective and expert guidance on whether you should liquidate or if there are other alternatives. In particular, if you are receiving court action threats for your debts, then don’t delay. Although there was a government moratorium placed on winding up companies, this has now been lifted for firms that owe £10,000 or more. You should look to avoid compulsory winding up if at all possible since it can make matters far worse for directors in terms of possible investigations and more difficulties should they wish to restart a business in the future. 

A licensed insolvency practitioner will be able to look at a range of options, including rescue solutions if these are feasible. They will also be able to advise you on dealing with creditors such as the Bounce Back Loan Lender. 

What Happens if I Liquidate with a Bounce Back Loan?

Liquidation may be the right course of action to take and a Creditors’ Voluntary Liquidation can ensure an orderly closure, where some debts may be written off – and this could include the Bounce Back Loan along with other unsecured creditors. 

Do Directors Have Personal Liability for Bounce Back Loans?

One of the main benefits of Bounce Back Loans, apart from their accessibility and low-interest rate, was the fact that no personal guarantees could be taken. This means that the lender will not be able to pursue directors for repayment personally. However, the exception is there was dishonesty in the application process, 

The purpose of Bounce Back Loans was to provide support because of the pandemic and not prop up firms that were already insolvent or likely to become so on 31 December 2019. It was not permitted to spend money for personal reasons – the Bounce Back Loan existed solely to help with business costs such as salaries, other business expenses, and restructuring other debt. In the case of fraud, it is possible that you could face investigations, personal liability, and even prosecution.

Can I Dissolve my Business With a Bounce Back Loan?

Striking-off or dissolution is a low-cost way of closing down a company, but it can only be an option if the company is solvent, If you are unable to repay your Bounce Back Loan, along with other debts, and are facing insolvency, then formal liquidation should be undertaken. 

At the current time, defaults with Bounce Back Loans are rising, as are other business debts. If you are finding it increasingly difficult to deal with your bank, HMRC, and other creditors, then make taking advice from a licensed insolvency practitioner the priority to both find solutions and plan a way forward.

References

  1. BRITISH BUSINESS BANK “Pay as You Grow”