Whilst Covid-19 and lockdowns all seem like a distant memory, the bounce back loans (BBLs) originally intended to help UK businesses through a difficult time are now causing their own problems.
Throughout 2023, we’ve seen a steady stream of businesses finding it impossible to meet their bounce back loan repayments. Whether it’s a change in markets, rising business costs, or that the loan should never have been approved in the first place, we expect the issue of BBLs to continue in 2024.
So, if this is currently the concern for you or your client’s business, what can be done?
Here are our top do’s and don’ts of dealing with bounce back loans.
4 things to consider when struggling to repay a bounce back loan
Do: check if you can reduce payment amounts for 6 months
Under the Pay as You Grow scheme (launched by the government) you may be able to reduce your payments to ‘interest only’. This means you’ll only be paying the interest and not the capital element of the loan for a period of up to 6 months.
Do: check if you can take a repayment holiday
The Pay as You Grow scheme also enables companies to take a repayment holiday and essentially defer all payments for up to 6 months. (A repayment holiday can only be taken once over the loan term).
Do: explore informal payment plans
Spreading an outstanding bounce back loan over a longer period is a great choice if repayments are out of reach, but would become manageable if monthly amounts could be lowered.
The last part of the Pay as You Grow scheme enables companies to contact the lender to request an extension of the loan term to 10 years (originally a term of 6 years), at the same fixed interest rate of 2.5%.
Do: get advice as soon as possible
The sooner advice is sought, the more options are available for the company in question. If you find you have exhausted all the above options and are still unable to pay, seek professional help.
What NOT to do when you can’t repay a bounce back loan
Don’t: strike off your company and run into the sunset
Bounce back loans were unsecured with no personal guarantees taken.
This has led to a myth that striking-off, or dissolving, the business (a low-cost way of closing down a company) would prevent the repercussions of defaulting.
However, striking-off is only an option for solvent companies. Provisions are in place for companies which have been struck off with outstanding bounce back loans to be restored to the register so the debt can be pursued. So, if a company is unable to repay a bounce back loan, the directors of the company must seek the advice of an insolvency practitioner for a legal and appropriate solution.
Don’t: sell assets off fore below their market value
When cash is tight, it can be tempting to start selling off assets for the required capital injection.
This is usually a bad idea because assets sold in a rush are more likely to be sold under their market value. In turn, this can make any further financial difficulties even harder to deal with, and could have personal consequences for the directors later on if the company folds and the liquidator investigates any such sales.
Don’t: take cash out of your business in a panic
As with any company facing financial difficulties, directors are advised to keep cash in the business.
Taking out lump sums, as an anxious director wanting to protect their own income, can have serious consequences if the company begins insolvency proceedings further down the line and investigations reveal that funds have been misappropriated.
Don’t: bury your head in the sand
Inaction can be just as damaging as taking ill-informed action. Whilst we advise not doing the above three things, burying your head in the sand won’t solve the issue either.
How to seek advice on your bounce back loan
The bottom line is that seeking advice from a licensed insolvency practitioner, as soon as possible, is the best thing you or your client can do for the business.
The possibility of defaulting on a bounce back loan is unsettling for any business owner. So the sooner that clarity can be provided on the next best steps, the better for all involved. Talk to our friendly team today and receive sound advice on your next steps.