Can a Company Write off a Bounce Back Loan?
A company can write off a bounce back loan, but typically this can only happen when the company is being liquidated.
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 indeed 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 its Bounce Back Loan?
Companies cannot write off a Bounce Back Loan (BBL). 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.
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:
- 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.
- 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.
- 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.
Can You Write Off a Bounce Back Loan if You’re Self-Employed or Sole Trader?
As a self-employed individual or sole trader, you cannot simply write off a Bounce Back Loan. The only exception is if you enter into a formal insolvency procedure like an Individual Voluntary Arrangement (IVA).
Despite being backed by the government, the responsibility for repaying the loan rests with the borrower. An IVA is an agreement that allows you to repay your creditors over a set period based on what you can afford, taking into consideration your income and assets.
To qualify for an IVA, you must meet certain conditions, including having more than one creditor and being unable to repay your debts in full. You must also demonstrate that you can maintain regular payments under the IVA.
Completing an IVA successfully means that any remaining debts will be written off. Be mindful that entering an IVA affects your credit score and future borrowing capability.
If you’re facing difficulty with Bounce Back Loan repayments, it’s critical to get advice from a debt advisor or insolvency practitioner to evaluate your financial position and consider the available options.
Can a Bounce Back Loan be written off if my company is still trading?
No, a Bounce Back Loan cannot be written off while your company is trading. The loan is intended to be repaid in full according to the agreed terms. Only through formal insolvency proceedings such as liquidation can the loan potentially be written off, and this would typically mean the end of trading for your company.
Will a Bounce Back Loan be written off if I cannot make repayments due to financial hardship?
Not immediately. If you’re facing financial hardship, you should first seek to make arrangements with your lender, such as utilising the PAYG options. If your financial situation doesn’t improve, insolvency proceedings might be the next step, where a loan could be written off, but this is a last resort.
Can a Bounce Back Loan be written off as a bad debt on my company’s accounts?
A Bounce Back Loan can only be written off as a bad debt in your company’s accounts if your company is going through insolvency proceedings. In active trading, it is considered a liability that the company is expected to repay.
Is there a legal way to write off a Bounce Back Loan without insolvency?
Legally, there is no provision to write off a Bounce Back Loan without going through some form of insolvency process, whether it’s a company liquidation or an IVA for sole traders.