Can a Company Write off a Bounce Back Loan?

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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10th April 2024

A company can write off a bounce back loan, if it is closed via the process of liquidation.

A bounce back loan is designed to be repaid. However, if a company is unable to meet its debt obligations and has to be liquidated, the loan can be written off as part of that insolvency process. It’s important for directors to understand that this is not a decision to be taken lightly and should be made with the guidance of a qualified insolvency practitioner.

We’ll explore the process below.

Will Bounce Back Loans be Written Off?

In the aftermath of the COVID-19 pandemic, there was speculation that the UK government might consider forgiving bounce back loans to offer further relief to businesses that had struggled during the crisis. The bounce back loan scheme was a lifeline for many businesses, providing critical funds to maintain operations during a period of profound economic uncertainty.

However, the idea of a universal write-off of these loans has not been put into action. Instead, the government has shown a clear intent to ensure that the loans are repaid. This commitment is reflected in the establishment of repayment terms that include several years of low interest, the option to extend the length of the loan, and payment holidays, all designed to facilitate repayment rather than forgiveness.

The government’s approach aims to balance support for businesses with the responsible management of public finances. For businesses, this means that bounce back loans should be treated like any other financial obligation, with plans in place to meet the repayment terms agreed upon with the lenders. The terms of the scheme included a government guarantee to lenders for 100% of the loan, but this guarantee does not remove the obligation of the borrower to repay the loan.

Can a Company Write Off a Bounce Back Loan if it Can’t Afford to Pay?

Companies cannot write off a Bounce Back Loan (BBL) if they want to keep operating. If the loan repayments are impacting cash flow but the business can still afford to pay, negotiation with the lender is possible. Under the Pay As You Grow (PAYG) scheme, businesses may extend their repayment period from six to ten years, easing immediate financial pressure and providing more flexibility in managing cash flow.

If a business faces insolvency and opts for voluntary liquidation, then it is possible to write off a Bounce Back Loan. During this process, the company’s assets are liquidated, and if the proceeds are insufficient to cover all debts, the Bounce Back Loan may be included in the debts that are written off upon the dissolution of the company. It’s essential for directors to consult with professional advisors before pursuing this course of action, as it involves the cessation of the business and has significant legal and financial implications.

Can You Write Off a Bounce Back Loan if You’re A Sole Trader?

The only method for a sole trader to potentially write off a BBL is through a formal insolvency process, such as an Individual Voluntary Arrangement (IVA).

In an IVA, a BBL is considered unsecured debt and can be included in the arrangement. This agreement allows the self-employed individual to repay an amount that is manageable, based on their financial situation. After successfully completing the IVA and repaying the agreed amount, any remaining unsecured debt, including the unpaid portion of the BBL, is written off. However, it’s important to seek professional advice to understand the implications of entering an IVA, as it can significantly affect credit ratings and future financial opportunities.

Can you Write off a Bounce Back Loan if You’re Self-Employed?

Being self-employed typically means you are operating as a sole trader or a partnership, outside of the limited company structure. This distinction is crucial because, unlike limited companies, sole traders and partnerships do not benefit from limited liability. In limited companies, the business is a separate legal entity from its owners, offering them protection from personal liability for business debts. However, as a sole trader or a partner, you are personally responsible for all business debts, including the BBL.

The only way a self-employed person might write off a BBL is through a formal insolvency process, such as an Individual Voluntary Arrangement (IVA). In an IVA, your BBL would be treated as unsecured debt and could be included in the arrangement.

What are your options if you cannot repay your Bounce Back Loan?

If you find yourself unable to repay your Bounce Back Loan (BBL), there are several options to consider:

1. Negotiate Flexible Repayment Terms with Your Lender: For both sole traders and limited companies, the first step should involve discussing the situation with the lender. Many lenders are willing to work with borrowers to adjust repayment schedules or temporarily reduce payment amounts to accommodate financial challenges.
2. Obtain Professional Debt Advice: Seeking guidance from experts such as ourselves is crucial. We can offer personalised advice considering your unique business situation, whether you’re a sole trader or run a limited company.
3. Individual Voluntary Arrangement (IVA) for Sole Traders: An IVA is a formal agreement where you repay a portion of your debts over a set period. This can be a viable option for sole traders facing financial difficulties, allowing them to continue trading while managing their debts.
4. Company Voluntary Arrangement (CVA) for Limited Companies: Similar to an IVA, a CVA is a formal agreement tailored for limited companies. It allows the company to pay back a portion of its debts over time, potentially avoiding liquidation.
5. Debt Relief Order (DRO) for Low-Income Sole Traders: If a sole trader has a low income, minimal assets, and their total debt falls below a certain threshold, they might be eligible for a DRO. This option can freeze debt repayments and interest for a year, potentially leading to debt write-off.
6. Bankruptcy for Sole Traders and Liquidation for Limited Companies: While a drastic measure, bankruptcy for sole traders and liquidation for limited companies are options when all other avenues are exhausted. These processes involve winding up the business and using any assets to pay off debts.
7. Business Restructuring: Both sole traders and limited companies might consider restructuring their business operations. This could involve cutting unnecessary costs, diversifying income streams, or reevaluating business strategies to improve financial stability.

Each of these options comes with its own set of considerations and implications, and the best choice depends on the specific circumstances of the business.

Alternatives to Writing off a Bounce Back Loan

The Pay As You Grow (PAYG) scheme was introduced by the government to provide businesses with flexible repayment options for their Bounce Back Loans (BBLs). This scheme offers three main alternatives to writing off a BBL via closing the company:

1. Extended Repayment Period: Companies can choose to extend the overall repayment period for their BBL by up to four years, extending the total repayment duration to ten years. This extension provides businesses with more time to generate revenue and gradually repay the loan without overburdening their current cash flow.
2. Interest-Only Payments: For periods of six months at a time, companies can opt to make interest-only payments on their BBL. This option temporarily reduces monthly payments, allowing businesses to allocate more resources towards operational expenses and prioritize essential business needs.
3. Repayment Holidays: In addition to the initial 12-month repayment holiday provided under the BBL scheme, companies can apply for an additional six-month repayment holiday through the PAYG scheme. This extension offers a period of respite from loan repayments, providing businesses with time to stabilize their financial position and prepare for future repayments.

By offering these flexible repayment options, the PAYG scheme aims to support businesses facing difficulties repaying their BBLs, helping them manage their debt responsibly and potentially avoid more drastic measures such as liquidation.

Bounce Back Loan Write Off FAQs