WHAT HAPPENS IF YOU CANNOT REPAY YOUR BOUNCE BACK LOAN?
Beverley Budsworth – MD of The Business Debt Advisor
BACKGROUND TO BOUNCE BACK LOANS “BBL’s”
BBL’s were launched by the government in May 2020 in response to the Covid pandemic. They provided SME’s with a cash injection to help them survive the pandemic which created enormous financial uncertainty. The scheme offered very favourable rates of interests for loans from £2,000 to £50,000 with zero percent in the first year and rates of 2.5 percent fixed for up to 6 years.
Around 1.6 million British businesses accepted the loan. This is around 55% of British SME’s. A total of 88BN was lent out through a number of British banks and other approved SME lenders.
COLLECTING THE BBL’S
18 months on and with the interest free period over, Bank are now collecting the monthly interest and capital repayments. Despite the favourable terms, thousands of businesses are struggling to repay the loans and it is estimated that 83% of borrowers have requested an extension under the PAYG scheme detailed below.
PAY AS YOU GROW “PAYG” SCHEME
The PAYG Scheme was originally announced by the Chancellor of the Exchequer in September 2020 and will enable businesses who have started repaying their Bounce Back Loans to:
- Request an extension of their loan term from 5 to 10 years at the same fixed interest rate of 2.5%
- Reduce their monthly payments for 6 months by paying interest only. This is available up to 3 times during the term of the BBL
- Take a repayment holiday of up to 6 months. This is available only once during the term of the BBL.
Borrowers can use these options individually or in combination with each other.
SME’S STRUGGLING TO REPAY
It is estimated that around £20 to £25BN of BBL’s will be not be repaid. There is also deep concern at many levels, not just Government, that many of the BBL’s were used inappropriately. It is estimated that the monthly defaults are averaging £5BN. Based on an average value of £25,000, this could mean as many as 800,000 BBL’s will not be repaid.
Even though the loans are 100% government backed, the lenders are obliged to pursue recovery of the loans and will only get repaid by the government when they can demonstrate that all reasonable efforts at recovery have been exhausted.
WHAT HAPPENS IF THE BUSINESS CANNOT REPAY THE BBL
The BBL’s were unsecured and no personal guarantees were required. So if a company is wound up/liquidated the directors will not be liable for these loans unless the loans have not been used to fund legitimate business expenses.
If the loans have been taken out of the company and used to fund personal expenses, there are actions that a Liquidator can take to seek recovery of the misused element of the loan.
There is also a Bill making its way through Parliament, name the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill. It has been approved by the House of Commons and is currently under review by The House of Lords but is likely to be approved. This will give the government department – The Insolvency Service – the power to disqualify directors and get “Compensation Orders” against them to repay loans used fraudulently.
TAKING ADVICE ON OPTIONS AVAILABLE
COMPANY VOLUNTARY ARRANGEMENT “CVA”
It is so much easier to make decisions when you have weighed up all the options. These options can only be properly investigated if you know what’s coming in and going out – a cash flow forecast which in the first instance excludes historic debt payments. This will identify what sort of surplus is available to cover your company’s debt payments. If there is a business that is worth saving but debt payments are crippling including the costs of redundancies, A Company Voluntary Arrangement “CVA” may be appropriate. A CVA can allow the business to carry on trading, freeze historic debt, get help from The Redundancy Fund to cover claims of employees that need to be made redundant. The frozen debt is then repaid by way of monthly contributions which get paid into the CVA pot from which distributions are made to creditors.
CREDITORS VOLUNTARY LIQUIDATION “CVL”
If the company cannot carry on trading, winding up the company voluntarily is likely to be a sensible option. The process involves an initial assessment of the company’s financial position and if CVL is appropriate, the Board of Directors instruct an Insolvency Practitioner to help with the process which has been simplified over the past few years.
USING THE BUSINESS DEBT ADVISOR
All of the potential options will have risks and benefits. It’s vital to speak to someone you can trust and who also knows what they are talking about. The Business Debt Advisor team have been advising directors for 22 years. There are very few problems we have not encountered. Doing the Right Thing is in our DNA.
The Debt Advisor Ltd which incorporates The Business Debt Advisor is authorised and regulated by The Financial Conduct Authority, number 659920. Beverley Budsworth, the MD and IP is licensed and regulated by The Insolvency Practitioners Association.