What to do if You Can’t Repay a Bounce Back Loan

The government’s bounce back loan scheme was part of a national response to supporting British SMEs during the unparalleled pressures of the COVID-19 pandemic. Businesses could borrow £2,000 to £50,000 for up to 6 years.

But several years later, what happens if you find yourself unable to repay the loan? What actions are likely to follow default? And what are your options if you simply can’t pay the bounce back loan?

What Happens if you Can’t Repay your Bounce Back Loan?

If a Bounce Back Loan isn’t paid, you should expect the lender to initiate a series of actions to recover the debt. They’ll contact you first to discuss the missed payments and outline some options.

Should these discussions not yield a satisfactory outcome, the lender will likely issue a formal demand for repayment. Failure to respond to this will lead to the lender taking legal debt recovery steps, which may include court action.

In cases where the borrower is a business, the inability to repay the loan might eventually trigger insolvency proceedings. This can lead to the compulsory winding up of the business and may have personal financial consequences for the directors, especially if there’s evidence of wrongful trading or misconduct.

It is essential for borrowers facing repayment challenges to seek professional advice promptly. The Company Debt team has helped 100’s of directors with bounce back challengers, and we’re here to help via phone, live chat or email should you have questions.

What are the Consequences of not Repaying a BBL for the Director?

The biggest consequence of non-payment could be that your business is forced into liquidation. If you are found guilty of misusing the bounce back you could even face disqualification as a director.

Assuming there was no wrongdoing, however, directors won’t face personal liability due to the scheme’s lack of a personal guarantee requirement.

This does not render directors entirely free from risk. However, during insolvency, insolvency practitioners are required to investigate directors’ actions to check for anything that might lessen creditor returns. They will also be checking for evidence of bounce-back loan misuse.

Some of the things they’ll be looking for include:

1. Fraudulent Activity or Misrepresentation: If a director falsely represented the company’s financial status or intentions in the loan application, directors could face personal liability for the loan and additional legal consequences.
2. Misuse of Funds: If directors did not use the loan for the intended business purposes, the director could be personally implicated.
3. Wrongful Trading: Continuing business operations when there’s no reasonable prospect of avoiding insolvency, without taking every step to minimise potential losses to creditors, constitutes wrongful trading. In such cases, directors can be personally liable for additional debts incurred during this period.

What are the Consequences of Not Repaying a BBL for the Business?

When a business fails to repay a Bounce Back Loan, the lender may take several steps to enforce the debt, potentially leading to the winding up of your business.

This process starts with the lender applying to the court for a winding-up petition. If granted, this petition leads to a court order that forces your business to cease operations and enter into compulsory liquidation. During this process, an appointed liquidator sells your business’s assets to repay creditors, including the loan amount due to the lender.

What Happens If a Sole Trader Can’t Pay a Bounce Back Loan?

If a sole trader can’t repay a Bounce Back Loan, the approach to debt recovery differs slightly from limited companies due to the lack of legal distinction between the sole trader and their business. Initially, the lender will reach out to discuss the repayment difficulties and explore potential arrangements. If these efforts don’t lead to repayment, the lender may proceed with formal demand notices and potentially escalate to legal action for debt recovery.

Since sole traders are personally liable for their business debts, failure to repay the loan can directly impact their personal finances. This could involve court actions that lead to orders for payment, which might require the sole trader to sell personal assets to cover the debt. In extreme cases, if the debt remains unpaid, it could lead to bankruptcy proceedings.

What Are My Options If I’m Struggling to Pay Back the Bounce Back Loan?

If your company cannot afford to pay its Bounce Back Loan, you can either ask your lender to spread the payments over a greater amount of time to reduce the burden, take a short payment holiday, or consider closing the company down via insolvent liquidation. You should be aware that the inability to repay a bounce back loan may mean you have crossed the threshold of insolvency, meaning you should take professional advice immediately.

Paying in Instalments

A time to pay arrangement is a flexible agreement between a business and HMRC, tailored to repay tax debts over an extended period, typically up to 12 months. This arrangement offers a reprieve from immediate VAT, Corporation Tax, Income Tax, and National Insurance contributions payments. While it won’t help with the bounce back itself, it could free up cash from other areas you could put towards repayments.

To qualify for a TTP arrangement, your business must demonstrate financial viability and present a credible debt repayment plan. HMRC meticulously evaluates each application, scrutinising the company’s financial history, current financial standing, and future prospects.

Company Voluntary Arrangements

A CVA stands as a legally binding agreement between a company and its creditors, enabling debt repayment over a manageable timeframe, typically up to five years. CVAs offer flexibility, allowing for debt reduction, extended repayment terms, or even debt write-offs.

To pursue a CVA, your company must be either insolvent or on the verge of insolvency. Additionally, a convincing debt repayment plan must be in place, demonstrating that the CVA serves the best interests of all creditors.

Individual Voluntary Arrangement

An Individual Voluntary Arrangement (IVA) offers a viable solution for sole traders struggling to repay a Bounce Back Loan. An IVA is a formal agreement between you and your creditors to pay back debts over a set period, typically five years. It allows you to make manageable monthly payments towards the total amount owed, based on what you can realistically afford after living costs.

How Do I Know If I Have Misused Bounce Back Loan Funds?

Misusing Bounce Back Loan funds is a serious matter that can lead to severe consequences, including personal liability for the loan. It’s essential to understand what constitutes misuse to ensure compliance with the terms of the loan. Generally, the funds were meant to cover business costs such as rent, salaries, and supplier payments, rather than personal expenses or investments not directly related to the business’s immediate operational needs.

If you’re unsure whether you’ve misused the loan funds, consider the following indicators:

1. Personal Expenses: Using the loan to pay for personal expenses, such as home improvements or non-business-related travel, is a clear misuse of funds.
2. Non-Essential Business Expenditure: Investing in projects or assets that are not essential to the business’s immediate operational survival or recovery could be considered misuse.
3. Diversion of Funds: Transferring loan money into personal accounts without a clear business justification or using it to repay personal debts is misuse.
4. Lack of Documentation: Failing to keep detailed records of how the loan funds have been spent can also be problematic, as it may suggest that the funds were not used appropriately.

If, after reviewing these indicators, you believe you may have misused the loan funds, it’s important to seek professional advice.

How Can We Help

At Company Debt, we understand the unique challenges businesses face, especially when dealing with the complexities of repaying Bounce Back Loans. Our team of licensed insolvency practitioners and financial experts is here to offer clear advice and tailored solutions to navigate these difficult times.

Whether you’re concerned about potential misuse of loan funds, struggling with repayment, or facing the prospect of winding up, we’re equipped to guide you through every step.

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