What are the consequences of defaulting on a bounce back loan?

If your company has defaulted on a Bounce Back Loan, it’s natural to be concerned about the possible ramifications for you as a director. In most cases, personal financial or legal consequences may not be applicable, assuming the loan was taken out in good faith and the company has been managed responsibly.

This guide provides a detailed overview of the subject of Bounce Back Loan default, outlining its causes, the potential actions from lenders and the government, and the implications for businesses.

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What is a Bounce Back Loan Default?

A Bounce Back Loan default occurs when a borrower who has received a Bounce Back Loan fails to fulfil the repayment obligations outlined in the loan agreement.

Under the Bounce Back Loan Scheme, the government initially covered the first 12 months of interest payments and any lender-imposed charges, allowing businesses to defer repayments during this period. After 12 months, the interest rate was set at a fixed 2.5% per annum. Businesses also had the flexibility to repay the loan early without incurring any additional fees.

If a business fails to make the required repayments after the initial 12-month deferral period, they are considered to have defaulted on the loan. General repercussions may include legal action, debt collection efforts, or negotiations for a revised repayment plan.

When Will my Lender Contact me if I Default on a Bounce Back Loan?

Generally, you should expect a formal notification indicating that you have missed a payment and outlining any additional fees or penalties.

Subsequent steps could involve more detailed correspondence, such as a letter of default or a request for immediate payment of the outstanding amount. The aim is typically to find a resolution and discuss options like restructuring the loan to make repayment more manageable.

It’s advisable to maintain open communication with your lender from the earliest signs of financial difficulty.

What Will Happen if I Default on my Bounce Back Loan?

If you can’t repay your Bounce Back Loan, you’ll face serious consequences, including:

  • Contact from your lender: They’ll remind you of the missed payment and ask you to pay up.
  • Formal default notification: You’ll receive a letter outlining your loan terms, the outstanding amount, and the consequences of defaulting.
  • Debt collection efforts: Your lender may try to collect the debt themselves or hire a debt collector.
  • Legal action: They may take you to court to recover the debt.
  • Government guarantee: The government will cover your lender’s losses, but you’re still responsible for repaying the loan.
  • Damage to your credit score: Defaulting will make it harder to get loans in the future.
  • Personal liability: You may be held personally liable for the debt in certain cases.
  • Insolvency: Your business may be forced to close if you can’t repay the loan.
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What Happens if I Default on my Bounce Back Loan as a Sole Trader?

Unfortunately, defaulting on your Bounce Back Loan as a sole trader can have serious consequences, as you lack the limited liability protection enjoyed by limited companies. Here’s a breakdown of what you can expect:

  • Missed Repayments: Your lender will begin charging late payment fees and interest, further increasing your debt.
  • Debt Collection: The lender may try to contact you to recoup the debt. Ignoring these attempts can worsen the situation.
  • Credit Rating Damage: Missed payments will significantly damage your personal credit score, making it difficult to borrow in the future.
  • Legal Action: If the debt remains unpaid, the lender can take legal action, including suing you for the outstanding amount. This can lead to a County Court Judgment (CCJ) against you, further impacting your credit score and making it difficult to sell assets.
  • Bankruptcy: In extreme cases, the lender may petition for your bankruptcy. This can force you to sell assets to repay the debt and limit your financial activity for several years.

How to Close a Limited Company after Defaulting on a Bounce Back Loan?

If you find the debt has become too much to handle, it is possible to simply close a company with a bounce back loan via liquidation and write off the debt. The bounce back loan debt will end with the company itself.

Here’s how to achieve that:

1. Decide to Close Voluntarily (Creditors’ Voluntary Liquidation – CVL): This is when you choose to shut down your company because it’s unable to pay its debts, including the Bounce Back Loan.

2. Hire an Insolvency Practitioner: This expert will handle the closure process. They’ll sell off your company’s assets and use the money to pay creditors, like the Bounce Back Loan provider.

3. Cooperate with the Liquidation Process: The insolvency practitioner will need to look into how you ran the company. Be ready to provide information and assist with their inquiries.

What You Might Face:

  • Risk of Personal Liability: If it turns out you didn’t manage the company properly, like misusing the loan or not stopping business when you couldn’t pay debts, you might have to pay out of your own pocket.
  • Possible Ban from Being a Director: If they find serious mismanagement, you could be disqualified from being a director of any company for up to 15 years.
  • Credit Score Impact: Your personal and company credit scores are likely to take a hit.
  • Public Record: The liquidation process and reasons behind it will be publicly available.

It’s crucial to handle this process carefully and seek professional advice to ensure everything is done correctly and to understand the implications for you personally.

Options for Businesses in Bounce Back Loan Default

If a business finds itself in default on a Bounce Back Loan, it has several potential options to consider:

  1. Communication with Lender: The business should promptly communicate with the lender to discuss the situation. Transparency and honesty about the company’s financial situation can lead to a more collaborative approach to finding a solution.
  2. Renegotiating the Loan Terms: In many cases, the lender may be willing to renegotiate the terms of the loan, such as extending the repayment period or reducing the interest rate. It’s in the lender’s best interest to help the business get back on track with repayments rather than incur the costs associated with a default.
  3. Payment Plan or Forbearance: The business might be able to negotiate a payment plan, which would involve making smaller, more manageable payments over a longer period of time. Similarly, the lender might offer a period of forbearance, which is a temporary pause or reduction in payments to give the business some breathing room.
  4. Debt Consolidation: If the business has multiple debts, it might be worth considering debt consolidation. This involves taking out a new loan to pay off the existing ones, usually with a lower interest rate or longer repayment period, which can make the debt more manageable.
  5. Professional Advice: Seeking professional advice your accountant or a debt specialist like ourselves can be very useful in understanding your options
  6. Insolvency Proceedings: In severe cases, if the business cannot pay its debts, it might have to consider insolvency proceedings. This could involve administration, liquidation, a Company Voluntary Arrangement (CVA), or other measures. Please ask us about this as this area is our core expertise.
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Are you Personally Liable if you Default on a Bounce Back Loan?

In principle, the bounce-back loan scheme didn’t come with the conventional document asserting personal liability, known as a personal guarantee. Thus defaulting shouldn’t mean serious potential consequences, such as bankruptcy, in most cases.

The sister scheme to BBL, the Coronavirus Business Interruption Loan (CBILS) differed slightly in that certain accredited lenders were requiring personal guarantees, but no BBL lenders were allowed to do so.

As such, there should be no personal liability for bounce backs, with the following exceptions.

  • Where the loan has been used to pay off another loan (perhaps with a personal guarantee). This is known as ‘showing preference’ and could be construed as fraudulent
  • Where the loan was taken out with the knowledge that the company was already insolvent
  • If you’ve committed wrongful or fraudulent trading or other directorial misfeasance
  • Where there’s evidence that directors abused the loan scheme or used it inappropriately

How can I avoid Defaulting on my Bounce Back Loan?

Avoiding default on your Bounce Back Loan is crucial for maintaining your business’s financial health and reputation. Here are some proactive steps you can take to prevent default:

  1. Communicate with Your Lender: Maintain open and transparent communication with your lender. If you anticipate any challenges in meeting your repayment obligations, inform your lender as early as possible. They may be able to offer flexible solutions, such as extending the loan term or reducing monthly payments.
  2. Utilize the Pay As You Grow (PAYG) Scheme: The PAYG scheme offers several options to help businesses manage their Bounce Back Loan repayments. You can extend the loan term, reduce monthly payments for six months, or take a six-month repayment holiday (up to three times).
  3. Seek Professional Advice: Consider consulting with a qualified financial advisor or business consultant. They can provide expert guidance on managing your finances, developing strategies for improving cash flow, and exploring debt restructuring options if necessary.

FAQs about Bounce Back Loan Default

A company director may face personal repercussions if the default on a Bounce Back Loan results from wrongful conduct or mismanagement. This could include disqualification from being a director and personal liability for the debt if there’s evidence of fraudulent behavior.

Contact your lender as soon as you foresee difficulties in repaying the loan. Lenders may offer options like extending the loan term, payment holidays, or restructuring the repayment plan to avoid default.

Typically, Bounce Back Loans don’t require personal guarantees, so the government usually won’t pursue personal assets for loan recovery. However, if there’s evidence of fraud or misrepresentation, personal liability might be considered.

Yes, defaulting on a Bounce Back Loan can affect your eligibility for future government business loans. Lenders often view a history of default as a higher risk, which could limit your access to future financial support from government schemes.

Article sources

All of our insolvency content is written licensed insolvency practitioners. The primary sources are listed below. Learn more about the standards we follow in our editorial guidelines here.

  1. Insolvency Practitioners are suggested to report potential cases of Bounce Back Frud here: https://www.tax.service.gov.uk/shortforms/form/TEH_IRF?_ga=2.131819727.192362486.1597067537-679006552.1591708728
  2. Insolvency Service takes action against businesses abusing COVID-19 financial support – https://www.gov.uk/government/news/insolvency-service-takes-action-against-businesses-abusing-covid-19-financial-support