What Happens If I Default On My Bounce Back Loan?

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These are troubling and desperate times, especially for small to medium-sized businesses (SMEs) that depend on their day-to-day operation to survive in the markets. Local businesses are mostly family-owned, and whatever profits they make through business, they take home to provide for the needs of the household. With almost the entire nation staying indoors, these same businesses are in the brink of shutting down.

For times like these, creative and effective measures must be enacted to ensure the survival of most businesses in the UK.

Just last month, the UK government launched a new loan program for SMEs: The Bounce Back Loan Scheme (BBLS). Before you start wondering about what would happen if you were to default repayments to this loan, it is important to understand how it works. Let us discuss what the BBLS is.

What Is The Bounce Back Loan Scheme?

To both lenders and borrowers, the BBLS is probably what they’d consider the most “ideal” loan. Lenders undertake no risk for loaning out money and borrowers face no immediate penalty or consequence should they fail to repay the loan. Both the giving and receiving end don’t have to worry about how the whole thing will play out. The question is if borrowers will not be held liable and lenders don’t risk anything in making the deal either, who becomes responsible for loan defaults?

The short answer is the UK government.

That’s right. The Bounce Back Loan Scheme is a 100% government-backed loan. This means that the lender will not be asking for any personal assets of yours to hold as collateral or guarantee. Because the UK government fully backs the loan, once you meet the minimum requirements, you can already avail of it. The UK government becomes your guarantor and will technically be held liable to the lender should default on the loan.

Isn’t This Too Much Of A Risk On The UK Government’s Part?

Well, yes. Executives and bankers have even made calculated predictions regarding the number of defaults this scheme should project by the end of this pandemic. Banks warn that around half of the 608,000 businesses that were approved for the BBLS will default or will file for bankruptcy before they can even pay off the borrowed amount. I talk more about this in Episode 135 of Uncover Wealth Radio, a podcast dedicated to bringing you the latest news about Coronavirus and UK businesses.  

Anyway, while the BBLS is a far smaller loan compared to other loan schemes launched by the UK government like the CBILS or Coronavirus Business Interruption Loan Scheme, the “no personal asset or collateral at stake” and “lenders will get paid either way” bits are what make it so vulnerable to exploitation. An executive even noted that should the scheme had followed normal lending processes, a fourth of the total number of applications wouldn’t have even decided to take out the loan. Some businesses are borrowing the money not because they have to but simply because they can.

The Bounce Back Loan Scheme is capped at £50,000 and given the data we currently have, the average loan taken out by an SME is around £30,000. The 2.5 per cent interest rate of the loan is also covered by the government for the first year which means that lenders are already guaranteed the 1-year interest for each of those 608,000 approved applications.

While the government is doing this to help local businesses thrive, executives and financial advisers fear that the later outcomes of this loan scheme will negatively impact efforts for recovery. We are, beyond a doubt, heading into a deep recession and money that could have gone to funding the recovery might be all spent paying off default loans.

Of course, this is not written in stone. Nobody knows if this will happen for sure. All financial executives are saying that we should expect both the best- and worst-case scenarios.

If everything goes according to plan and only 10 percent, as the Office for Budget Responsibility had forecasted, of the loans are defaulted, then 90% of businesses survive and repay what they owe to lenders. This, in turn, frees the government from any financial liability they may have to lenders, except for the 2.5% fixed interest rates for the first year of the bounce back loan.

Worst case scenario, lenders find it near impossible to recoup the money lent to businesses because of incapacity to pay or bankruptcy and around half of the loans are defaulted. Since the loans are 100% guaranteed by the government, lenders won’t suffer losses, but the toll on the recovery budget will be immense.

What Will Happen To You If You Default On Your Bounce Back Loan?

If you have followed the article closely, the answer to your question is probably answered by now. Technically, there are no grave repercussions if you default on your bounce back loan. You won’t lose any assets, and it will not directly affect your credit score either. In the first place, credit checks are not mandatory for application to the loan scheme. This is why it is easier to get approved for the loan.

However, some banks do say that they will take defaults in consideration for standard loan applications in the future. Bank lenders are also instructed by the government to recover loan payments following standard procedure. They also reiterate that they’ve been clear about these loans being repayable and not just grants that can be written off if SMEs refuse to pay. Furthermore, they said that bank lenders are still the ones to make the final decision with regards to the approval of the loan.

Case in point, it’s possible to get away unscathed if you default on your bounce back loan. However, it would be best if you also thought about the consequences such actions would have for the country. If the government exhausts its funding to settle unpaid loans to lenders, there may be yet another tax hike to cover for the huge loss. We’re already expecting income tax to spike in the next two or three years. If borrowers do not take responsibility for their loans at this time, we can be in for even bigger trouble.  

If you have more questions about the Bounce Back Loan Scheme, feel free to get in touch with Annette & Co. Better yet, tune in to the next episode of Uncover Wealth Radio. I talk about recent updates and news surrounding government loan schemes and grants that you may find helpful to your business, so be sure to check it out!

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

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