The government’s Bounce Back Loan Scheme has provided a lifeline to many businesses during this unprecedented time.
However, even with that injection of working capital, there’s no guarantee that your limited company will survive.
In this guide, we’ll take a look at what happens to Bounce Back Loans on liquidation and explore the potential consequences for your business.
What is a Bounce Back Loan?
The Bounce Back Loan Scheme (BBLS) was introduced by the government as part of its coronavirus business support package, following criticism that the Coronavirus Business Interruption Loan Scheme (CBILS) wasn’t getting help to the businesses that needed it.
Bounce Back Loans are designed to give small businesses fast access to loans of between £2,000 and £50,000 to cover the additional costs associated with the coronavirus and help them weather the ongoing restrictions.
The loans are provided interest-free for the first 12 months followed by a competitive rate of interest of 2.5%, which is fixed for up to six years. There is also a 12-month grace period before monthly repayments must begin. The government provides 100% of the security for the loan, so no company assets are at risk and no personal guarantees must be given by company directors.
The application process is designed to be very quick, with the Chancellor Rishi Sunak promising that the funds could be in company bank accounts within as little as 24 hours, although as yet, that has rarely been met.
What is the Qualification Criteria for Bounce Back Loans?
To be eligible for a Bounce Back Loan, businesses must confirm that they have been adversely impacted by Covid-19 and that the business was not in financial difficulty before 31 December 2019. That includes being insolvent, undergoing a debt restructuring procedure or entering into liquidation. Eligible businesses can borrow up to 25% of their annual turnover, up to a maximum of £50,000.
Businesses that were already in difficulty on or before 31 December 2019 may still be eligible for the loan but the sum they can borrow may be reduced and there could be additional restrictions on how the money can be spent.
How can a Bounce Back Loan be Spent?
There are very few restrictions on what the funds can be used for, as long as it brings an economic benefit to the business. That could be by boosting the company’s cash flow, paying salaries or buying stock. The loan cannot be used to benefit the company directors personally by increasing salaries, paying dividends or paying off the balance of a directors’ loan account.
Can I Liquidate my Company if I Have a Bounce Back Loan?
If the business does fail, it can still be liquidated via a creditors voluntary liquidation (CVL) just like any other insolvent company.
In that instance, the Bounce Back Loan, which is classed as an unsecured debt in insolvency, would be repaid from the sale of the company’s assets on liquidation in accordance with a strict creditor hierarchy. Any unpaid debts will be written off, the company will be closed down and the directors will be free to start a new business or look for employment.
The only issue that could arise when liquidating a company with a Bounce Back Loan if it is found that the funds were not used for the stated purpose i.e. for the economic benefit of the company. There have been rumours that Bounce Back Loans are being used to buy personal assets, invest in property, pay dividends and pay down unsecured director loans.
If your company enters into any form of insolvency procedure, the liquidator or administrator will investigate the cause of the insolvency, including what the funds from the Bounce Back Loan were used for. If they find that you have misused the money, you could be forced to repay the loan to the company and be disqualified from acting as a company director for up to 15 years.
Will Bounce Back Loans be Written off if the Company Goes Bust?
If you liquidate the company, the bounce back loans would be written off, as with all other limited company debt.
Since these loans are not personally guaranteed, there should be no repurcussions assuming no directorial misfeasance has taken place.
Am I Personally Liable for a Bounce Back Loan?
No. As long as the funds have been used correctly i.e. no acts of misfeasance, wrongful or fraudulent trading or paying creditors in preference are discovered, then you will not be liable to repay the loan personally on liquidation. That’s because the loans are 100% guaranteed by the government and no personal guarantees need to be given by company directors.
When the company enters liquidation, the Bounce Back Loan will become an unsecured debt and the secured debts of the company will be repaid first. In reality, that means the unsecured debts are rarely repaid in full. In that case, as the loan was 100% guaranteed by the government, the bank that provided the loan will demand repayment from the government and not from the company director, as would be the case if personal guarantees had been signed.
Can I Use a Bounce Back Loan to Pay Off Debt?
One way a struggling business may choose to use a Bounce Back Loan is to refinance existing borrowing. However, you must be very cautious when taking this approach. When a company is insolvent, it must operate in the best interests of its creditors as a whole. If, for example, a debt that you have personally guaranteed is repaid while other unsecured creditors are not, this is likely to be seen as an act of misfeasance known as making a ‘preference’.
Wrongful trading provisions have been suspended for the time being to allow directors to continue trading when their company is at risk of insolvency without the threat of becoming personally liable for company debts. However, this does not include the rules around preference payments. Therefore, if the company does fail and it is found that you repaid a creditor ahead of others, you could face personal liability for the repayment of unsecured debts, including the Bounce Back Loan.
What are the Alternatives to a Bounce Back Loan?
Whatever situation you find yourself in, whether you have been refused a Bounce Back Loan, need access to more funding or are better suited to finance that’s structured differently, there are other options worth considering.
- Alternative business finance
Although the terms of the Bounce Back Loan are attractive, it may not give your best the chance of survival. For example, invoice finance, which provides quick access to capital that does not need to be repaid in the same way as a loan could be a better fit. It will give you access to a percentage of the company’s unpaid invoices within just 24 hours of them being sent to the customer to ease cash flow issues now and in the future. Unlike a Bounce Back Loan, this form of funding can be immediately turned off when it’s no longer needed, without being tied to an agreement for up to six years.
Alternatively, if you are unable to access a Bounce Bank Loan, standard commercial loans are available from mainstream banks and more specialised lenders. That could be another way of securing vital funding for your business.
- Coronavirus Business Loan Interruption Scheme (CBILS)
If you have been declined a Bounce Back Loan or need access to more funds to keep your business afloat, you could apply for a loan through the Coronavirus Business Interruption Loan Scheme (CBILS). That provides loans of up to £5 million that are repayable over terms of up to six years. The government covers the cost of interest and fees for the first 12 months and provides lenders with a guarantee for 80% of the loan.
However, directors should be aware that the eligibility criteria for the CBILS are quite stringent, so companies that have been turned down under the BBLS may find their application is refused.