Bounce Back Loans: A Complete Guide for Limited Companies

November 9, 2023 / Bounce Back Loans

During the height of the Coronavirus pandemic, the U.K. government implemented the Bounce Back Loan Scheme to try to help companies through the difficult times. Eligible companies could take out up to £50,000 to help them stay afloat. While this was effective for some companies, others continued to struggle despite the support.

The Bounce Back Loans required repayment, which meant that some companies encountered trouble when the time came to repay their loan. If your company falls into this category, all hope is not lost, and recovery methods can be pursued with the right knowledge.

In this article, Clarke Bell provides a complete guide to Bounce Back Loans. We will cover a brief history of the Bounce Back Loan Scheme, the effects it had on companies, and what options are available for those struggling to repay their loan.

What is a Bounce Back Loan?

Bounce Back Loans were implemented as part of the Bounce Back Loan Scheme. They aimed to provide a financial lifeline for SMEs hit especially hard by the Coronavirus pandemic. Eligible companies could apply for a government-backed loan of up to £50,000, depending on their income. Companies would still be expected to make repayments, as they were not grants. However, some directors claim to be unaware of that fact.

What can I use a Bounce Back Loan for?

Bounce Back Loans could be used for a wide variety of purposes. According to the Bounce Back Loan Scheme, the funds could be used for anything that benefits the company. This includes the payment of employees, purchase of stock, repayment of other loans, and other expenses that help keep a company afloat. However, expenses that do not directly benefit the company, such as purchases for a director’s personal use, were not acceptable as part of the loan agreement. Should directors have made any such purchases with Bounce Back Loan funds, then penalties could apply.

Can a Bounce Back Loan be used to pay dividends?

Some directors took out a Bounce Back Loan with the intention of using it to pay shareholder dividends. Unfortunately, this was not an acceptable use of the funds. Bounce Back Loans could only be used to cover costs that directly benefited the company in question. This means that although employee salaries were an acceptable purpose, director and shareholder dividends were not.

Repaying your Bounce Back Loan

Although Bounce Back Loans were a lifeline for many companies, they were given as a loan – i.e. with the expectation being repaid. Bounce Back Loans did have a grace period in which repayments were not required, but this period has long since ended.

Now that the time has come for companies to repay their loan, some are having problems doing so. A lot of directors are looking now for answers to their questions about the loans.

What are the interest rates for a Bounce Back Loan?

Bounce Back Loans have quite competitive interest rates. Each loan has a fixed interest rate of 2.5%, regardless of the overall sum. The 2.5% interest rate was not payable until 12 months after the Bounce Back Loan was obtained, though this period has now passed for all Bounce Back Loan borrowers.

If you are struggling with your Bounce Back Loan interest payments, there are methods you can employ to reduce the overall cost, or buy time to improve your company’s financial position to make future repayments easier.

Can I transfer a Bounce Back Loan to another company?

Bounce Back Loans were intended to support the company that obtained the loan, as stated in the loan agreement. This means that, even if directors intended to repay the loan in full, they could not transfer the Bounce Back Loan to another company at any stage. If directors attempt to do so anyway, this could result in directors being guilty of misconduct, which in turn could result in a series of penalties being applied.

Read More >>> Transfer a Bounce Back Loan To Another Business

What if I can’t pay my Bounce Back Loan?

Bounce Back Loans were given out with the expectation of repayment. While some companies were able to make these repayments, others could not resolve the issues that emerged due to the pandemic, and so struggled to keep up with loan repayments. However, it is possible to make the repayment process easier, due to a series of additional options.

Read More >>> What You Can Do If Struggling To Pay Your Bounce Back Loan

Can you apply for a Bounce Back Loan extension?

As some companies struggled with the repayment of their Bounce Back Loan, the government implemented the Pay As You Grow (PAYG) Scheme. This scheme aimed to make repayment easier for struggling companies, while ensuring lenders still received the full amount due to them.

Under the PAYG scheme, companies were able to apply for a Bounce Back Loan extension. With this scheme, directors can extend their repayment term from six to ten years. While doing so can make it easier to keep up with monthly repayments, it will mean paying a larger amount of interest.

Also Read >>> Will Bounce Back Loans Become Grants?

Is it possible to defer a Bounce Back Loan?

Deferring the payment of a Bounce Back Loan is also possible. Under the PAYG scheme, company directors may apply to defer payments in two ways. First, directors may apply to completely defer all payments for six months. This method can only be used once per borrower, though it can grant enough of a grace period for a company to make improvements to its cash flow and keep up with future repayments. However, this method has the drawback of allowing interest to continue accruing, leading to borrowers paying more once the six-month period has expired.

The second deferral method is to apply for interest-only payments. This option may be used up to three times, and allows borrowers to benefit from a repayment holiday while still keeping the amount payable from growing. For companies that need a small breather, this could be a good option.

Is it possible to write-off a Bounce Back Loan?

Pursuing a debt write-off can be a viable solution for some loans. A write-off can be done as part of an insolvency procedure resulting in a debt essentially no longer being owed. While some directors may think a write-off could be a viable method of dealing with Bounce Back Loan debt, especially as they are guaranteed by the government, write-offs are not easy.

Although not impossible, writing off company debt is quite difficult. The government will only cover payments if it is impossible for a company to do so; the company must make every effort to repay, and its lenders must make every attempt to collect. If full repayment simply is not an option, then a company can be entered into an insolvency procedure, such as Creditors’ Voluntary Liquidation.

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Can a director assume personal liability for a Bounce Back Loan?

Broadly speaking, company directors will not be held responsible for company debt, even if their company cannot make repayments. The debt is underwritten by the government and does not require directors to provide any security themselves. As such, the debt will not be transferred to directors, even if the company defaults.

While this is true in most cases, there are scenarios in which directors will assume personal responsibility for their company’s Bounce Back Loan. The main scenario is where there is a breach of the Bounce Back Loan agreement. Directors are expected to use the funds for the benefit of the company and for no other reason. Should directors have ignored this rule, and instead spent Bounce Back Loan funds for personal reasons, they may be ordered to pay that part back out of their own finances.

Closing a company with a Bounce Back Loan

If you are thinking of closing a company with an outstanding Bounce Back Loan, you need to make sure that you choose the correct way to do it.

Liquidating a company with a Bounce Back Loan

Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation (CVL) is a method of liquidation available to insolvent companies – i.e. ones that cannot repay their liabilities as they come due, or have more debts than assets. If your company has a Bounce Back Loan it cannot repay, then this procedure could be a good option.

Closing a company via a CVL requires an insolvency practitioner (like Clarke Bell) to carry out the procedure. As it is a voluntary procedure, directors may appoint an insolvency practitioner of their choice. The chosen insolvency practitioner / liquidator will then take the reins of the company, relieving control over the company from the directors. While in this position, the liquidator will identify all company assets, dispose of them for the highest possible price, and distribute the proceeds amongst outstanding creditors. If possible, the Bounce Back Loan will be repaid at this point. Once all possible distributions have been made, the company will be wound up and removed from the Companies House register. Should any debt remain, it will be written off, excluding those secured by personal guarantees. This includes Bounce Back Loan debt – as long as the loan has been used correctly.

Compulsory liquidation

Compulsory liquidation is also intended for insolvent companies, though it is generally best avoided where alternatives are possible. This method of liquidation does have the same goals as other forms of liquidation and will aim to repay a Bounce Back Loan and other debts, but the procedure lacks the benefits of a CVL. For example, directors cannot appoint an insolvency practitioner of their choosing, and they can be seen to be displaying a lack of pro-activeness in dealing with the debts of their company.

This lack of initiative can cause further problems, especially if creditors make accusations of misconduct. In the worst-case scenario, creditors can take directors to court with the intention of recovering debt. If the courts find that directors have failed in their duties, they may be expected to repay the debt using their own finances, along with potentially facing other penalties.

Dissolving a company with a Bounce Back Loan – is not allowed

If your company has any outstanding debts that it cannot pay back – including a Bounce Back Loan – then you cannot just dissolve it. The attempt to do so will be blocked by the creditors who are still owed money.

Clarke Bell can help

Bounce Back Loans had a varying effect on companies. For some, they were a much-needed lifeline that helped to keep their doors open during and after the crisis caused by Covid. For other companies, the loan was not enough to prevent them suffering serious financial difficulties.

If your company is struggling to repay its Bounce Back Loan debt, let Clarke Bell help you.

We have more than 29 years of experience in helping companies solve their financial problems, and we can do the same for you.

Contact us today for your free consultation, and find out the best option for dealing you’re your situation.