The business loan scheme, aimed at SMEs, offered to fund up to £5 million and closed to new applications on 31 March 2020. A growing number of businesses now have to start covering the monthly repayment, after the first 12 months of the loan were allowed as a payment holiday by the lender. But, what if your limited company has not been able to recover sufficiently and cannot meet its outstanding debt?
You are not alone. Even if the pandemic is having less of an impact, it has not gone away and the economy is far from recovered. It can be particularly tough for smaller businesses and they are seeing an end to the furlough scheme, rising costs, supply chain problems are common and some sectors are affected by extreme staff shortages. No wonder many businesses are under pressure and this is evidenced by rising numbers of insolvencies.
If your business can’t repay its CBILS loan, you have some important decisions to make. Directors must avoid putting their heads in the sand – be aware of what is owed, monitor finance very closely, and be prepared to seek advice.
Are Your CBILS Repayment Problems Temporary or Permanent?
A key issue for directors is to decide if they believe their financial problems are only temporary. A situation can worsen quickly if there are loan defaults and creditors are threatening action. A business may, however, be able to obtain some breathing space if it can show that its cash flow problems can be resolved, such as if it has a significant amount of payments due or has won an important new contract, for example.
Notably, it should be possible to extend the payment term of your CBILS loan from six years up to a maximum of 10 years – providing the company is viable and at the discretion of the lender. Further, paying a CBILS loan could be eased if the director also seeks help for its other debts such as via the HMRC scheme, Time to Pay – GOV.UK “HMRC Time to Pay” . Other refinancings may be possible and invoice financing could also boost cash flow.
Take Advice on Dealing with CBILS Loan Repayment Problems
It can be difficult for directors to gain a full picture, particularly if they are under pressure. They may well need advice on how to deal with creditors, including the CBILS lender. Seeking guidance from a licensed insolvency practitioner should be seen as a priority – they are experts and are experienced both in company rescue as well as liquidation matters.
Possible solutions in terms of a business rescue could be a Company Voluntary Arrangement, where a monthly repayment is agreed upon with creditors. This legally binding solution allows a business to keep trading. Alternatively, the administration allows an insolvency practitioner to take control on a temporary basis and means the business could either be restructured or sold.
Will I be Personally Liable if a CBILS Loan Can’t be Repaid?
CBILS loans of up to £250,000 were provided on an unsecured basis, which should be reassuring for directors. A limited company is required to repay the full amount of the loan if they remain to trade. However, if the business enters liquidation then unsecured creditors – and this includes the lender of a CBILS loan – will not receive payment. This is because when there is insolvency it is highly unlikely there will be funds left, particularly after creditors of higher priority have been paid. As a result, it is likely the CBILS debt will be written off. It should be noted that the government provided a guarantee – as outlined by the British Business Bank – to meet 80% of the sum lent and that a bank would therefore only write off 20% of the loan’s value.
However, if your business took out a larger loan of above £250,000 then lenders were entitled – at their discretion – to request security subject to certain rules. This meant that a personal guarantee could be taken but it was subject to a 20% cap of the total loan amount and also could not apply to the director’s primary residence. Be aware though, that the bank or other lender will seek to recoup what is due and this could mean it requires the sale of another business asset.
Can I Dissolve my Company if I Can’t Repay a CBILS Loan?
A limited company can only be dissolved by its directors if it has paid off all creditors
GOV.UK “Closing a Limited Company . So, if the CBILS loan, and indeed other debts are owing, then a formal liquidation is necessary. It is important that directors avoid compulsory liquidation if at all possible. Instead, a Creditors’ Voluntary Liquidation gives them more control, should be less costly, and puts them in a better position if they wish to launch another business.
Be aware too that if a director dissolves their business while it is insolvent, they could face investigation by the Insolvency Service and possible prosecution, including disqualification from acting as a director.
There will be many UK businesses that are finding it hard to repay their CBILS loans – but each situation is different. If you are uncertain about what the most appropriate action to take is, be sure to take tailored advice for your particular circumstances.
All Company Debt insolvency content is written by our licensed insolvency practitioners.
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy here.