The Bounce Back Loan Scheme (BBLS) allowed eligible businesses to borrow between £2,000 and £50,000. It could be used for any business related expenditure to protect staff, customers, and to survive the impact of Covid 19.
There are relatively few rules that dictate how Bounce Back Loans can be used. As long as the funds meet the broad goal of benefiting the company economically, then the directors can choose to use them as they please. That includes paying company bills, buying supplies and paying staff wages.
You aren’t allowed to use this loan for personal reasons – it’s designed to provide ‘economic benefits’ to your business.
What Happens if you Default on a Bounce Back Loan?
Defaulting on a BBL is not as significant as defaulting on a loan with a personal guarantee attached since the lenders have no security over any of your assets.
That said, the government has advised lenders to follow their usual protocols for chasing and enforcing loan defaults. This will mean threatening letters, court action and potentially baliffs if you don’t pay, within what timeframe remaining unclear at this point.
As with many aspects of the response to COVID-19, the speed of the Bounce Back Scheme Rollout has left gaps in the official legislation, one of these being exactly what recourse the lenders have to chase borrowers for unpaid loans through the courts. These gaps are being closed – The Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Bill
Can you pay certain creditors ahead of others?
Under the terms of the Bounce Back Loan Scheme, the funds can be used to refinance existing company debt. However, you must be extremely cautious if this is a route you plan to take. If the company is or becomes insolvent, you are legally obliged to act in the best interests of the creditors as a whole. If repayments are made to certain creditors and not others, then as a company director, you risk making preferential payments that could lead to you being made personally liable for the company’s debts.
If you’re a limited company director you could a face a considerable tax charge if you withdraw the loan as personal income/a dividend and there are insufficient profits to support it.
Tax bills have been of particular concern for many businesses during the pandemic, but the government also brought in special measures that allow businesses experiencing a downturn due to coronavirus to defer some tax payments.
As such, if you were registered for tax in the UK and experiencing financial distress due to the pandemic you were able to defer the second self-assessment payment on account that was due on 31st July 2020 to 31st January 2021.
You may also have used the government’s VAT payments deferral scheme, which was introduced earlier this year to relieve some of the financial pressure on VAT registered businesses. It allowed businesses struggling due to coronavirus to defer to the end of March 2021 the VAT that was due for the period 20th March 2020 to 30th June 2020. This scheme has now been updated to allow you to pay your outstanding VAT in instalments without penalty up to a new deadline of 30th March 2022 if you opt in.
Delay your Bounce Back Loan repayment
If you were one of the 1.4 million companies who took advantage of the Bounce Back Loan Scheme, as of the 8 February 2021, you can delay the repayments by an extra six months.
This delay was designed by the government to give businesses greater flexibility in repaying their debt and a better chance of surviving the negative impact of the pandemic-induced shutdowns or reduced trading.
The ‘Pay as You Grow’ scheme allows the borrowers to make no repayments until 18 months after they originally took out the loan and also extend the length of their repayments from six to ten years, which could reduce the monthly repayment amount by almost half.
Entering into Insolvency with a Bounce Back Loan
When a business enters into a formal insolvency procedure, any transactions made during and in the period leading up to the insolvency will be scrutinised by the insolvency practitioner. If they find that the Bounce Back Loan was used to make payments to certain creditors and not others, you could be made personally liable to the value of the payment. The transaction will also be scrutinised by the Insolvency Service to determine whether you should be disqualified from operating as a director in the future.
How to close your company with a Bounce Back Loan owed?
For more information on government backed loans and professional advice on whether you should pay your tax bills with your Bounce Back Loan, please contact one of our partner-led team at Lucas Ross – Business Rescue, Recovery & Insolvency. We offer free same-day consultations, and operate a broad network of offices around the UK. Contact us at help@lucasross.co.uk or call us on 0330 128 9489
