What If I Cannot Repay My Bounce Back Loan?

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In efforts to buffer the adverse effects of the Coronavirus pandemic to UK markets, national and local authorities work together to devise schemes to support the dwindling economy. The government considers small to medium-sized businesses, commonly referred to as SMEs, as significant pillars to local markets and necessary to the recovery of Britain post-crisis. Thus, they have launched several support programs that can help see small business owners through this challenging time. Loans, being an

The first scheme launched was the Coronavirus Business Interruption Loan Scheme or the CBILS. However, this particular loan program received a lot of criticism from various establishments because of its stringent qualification criteria. In the end, only a fraction of the total number of applications has been granted funding under the CBILS, leaving SMEs with little to no resources to sustain their businesses. To remedy the situation, the UK government launched another loan program, the Bounce Back Loan Scheme (BBLS)

What Is The Bounce Back Loan Scheme?

The Bounce Back Loan Scheme (BBLS) is a 100% government-backed loan offered to Small and Mid-sized businesses to help them keep their finances at bay during the lockdown period. The main aim of the loan is to support pre-existing businesses that have been heavily affected by the Coronavirus until such time they can resume their operations and “bounce back.” The BBLS, as authorities define it, is a fund scheme devised to accommodate smaller businesses that do not qualify for the CBILS. It’s fast, more lenient in terms of application requirements, and has lower risks for lenders.

Under this scheme, claimants can take advantage of loans up to £50,000, that is 100% guaranteed by the UK government. This means that directors or shareholders of the businesses do not have to present personal guarantee for the loans; their individual credit ratings will not be considered as well. In other words, the liability falls solely on the company itself and should it fail to “bounce back” post-crisis and files for insolvency, the defaulted Bounce Back Loan will be paid off by the government to authorized lenders.

Not only that, but the BBLS also offers a competitive interest rate of 2.5 per cent per annum, with a grace period of one year. This means that repayments and interests are waived for the first twelve months. Also, repayments can be stretched up to six years, giving small businesses ample time to recover from the strain of the lockdown. This loan scheme, together with the other fund schemes of the UK government, purports to ease the transition of businesses to the “new normal.”  

While applications for BBLS are indeed processed faster, the 24-hour “file-to-claim” process that Chancellor Sunak announced has been poorly met since the scheme’s launch. The primary reason for this is the lack of authorized banks to process the loans. Still, the £2 billion that has been released to half of the 130,000 applications received in May is considerably better compared to the outcomes of the CBILS applications.

What If I Default On My Bounce Back Loan?

As previously mentioned, the BBLS is a 100% government-backed loan scheme. As far as liabilities go, you (along with other shareholders and directors your company may have) will not be held personally responsible for the default. Technically, credit ratings won’t be affected since the loan is tied to the business, and no personal guarantee has been required from the claimant’s part.

Of course, certain conditions must be met, and proof of the business’s deteriorating condition must be presented in order to rule the default as an unfortunate and unintentional event. The reality of businesses “bouncing back” after the lockdown period is not sealed in stone. In fact, several economists have already pointed out that the number of defaults post-lockdown may be overwhelming.

Upon perusing the data that is available to us now, I also have to agree with the statement. We are heading into a deep recession and unless relevant actions are taken to adapt a business to the “new normal,” many would be unable to bounce back even after trading activities resume. I talk more about how traditional companies can overcome this problem and innovatively transition to a highly adaptive and profit-generating business even during the lockdown period. You can catch daily updates and news on the Coronavirus and UK businesses by hopping on to my weekday Podcast, Uncover Wealth Radio Episode 143

What Can Be Considered As Misuse or Abuse Of The BBLS?

While businesses can use the money received under the Bounce Back Loan Scheme according to their preferences, there are certain payments that may not be well-received by authorities later on when you file for an insolvency procedure or liquidation. One example is paying off outstanding loans to lessen the personal liabilities of directors or shareholders of the company.

A business can use the BBLS to pay off outstanding loans. In the same way, they can use it to pay off salaries, increase working capital, or even to simply improve cash flow. However, they cannot specifically prefer to pay off loans with personal guarantee without due reason and leave out unsecured lenders. It will be considered as an act of misfeasance.

After all, a business may purposefully let their business go under after the lockdown is lifted and minimize their liabilities by paying off outstanding loans with personal guarantees. Since defaulting BBLS has no immediate consequences to borrowers, it can be used for the wrong reasons. If you plan to do the same, do not. This abusive use of the BBLS may be reflected in the liquidation procedure should you file for bankruptcy later.

The example given above is largely the reason why economists fear the outcome of the BBLS. To prevent such occurrences from happening, businesses that have experienced financial troubles or difficulty prior to December 31st last year are not allowed to apply to the Bounce Back Loan Scheme. This loan program is strictly for businesses that have experienced the adverse effects of the global pandemic, and not for those that are already in the brink of insolvency from a while ago. There are exceptions for some businesses that have shown financial constraints before the Coronavirus affected millions (prior to December 31st) to avail of the BBLS. However, added restrictions and limitations on loan may be put in place.

If you have more questions about the Bounce Back Loan Scheme or you simply want to hear more about the latest updates on UK businesses and the Coronavirus, you are welcome to join us LIVE on the next episode of Uncover Wealth Radio. We broadcast from Monday to Friday at 11:00 AM. Follow Annette & Co. on social media for more updates! You can also join my exclusive Facebook group that talks about a lot of business matters and UK businesses.

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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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