What is bounce-back loan fraud and what will happen to me?
The UK Government introduced the bounce-back loan scheme at a time when many business owners were in need. The pandemic led to high levels of uncertainty and a lot of worry for directors. Providing you applied and used the loan correctly, you should face no consequences. In this article, we’re looking into bounce back loan fraud.
Bounce back loans were available for many companies. Companies were able to apply for 25% of their annual turnover, with a maximum loan of £50,000. This was a great government scheme to support directors who feared their companies may not pull through.
It is estimated that up to 500,000 businesses were able to remain open due to the introduction of bounce-back loans. Most directors completed their loan application honestly, but some did not. These directors are now worrying about bounce back loan fraud checks.
What are bounce back loan fraud checks?
Bounce back loan fraud checks are still underway, and directors will face the consequences if they are found guilty of bounce back loan fraud.
Acting responsibly with your loan is one of the key areas that will be looked at when it comes to bounce back loan fraud checks. This means that the money was spent for the economic benefit of the business. This could have been for things like staff wages, running costs of a premises, VAT, corporation tax, stock and even the director’s salary.
Applying for the bounce-back loan
When applying for the bounce-back loan scheme, it was made clear to businesses that there was no personal guarantee involved. This means that if you ended up in a position whereby you could not afford to pay the Covid loan back, the government would cover the costs. Of course, this is only the case if you can prove that you have been responsible with your loan and applied for the correct amount that you were entitled to.
The lack of personal guarantee also gave directors security in that personal belongings were not at risk if their business defaulted on the loan and could not pay it back.
If you have not taken the government up on their Pay As You Grow (PAYG) scheme, then it’s likely that you’ve started paying back your loan now.
What should the bounce-back loan scheme money have been spent on?
Paying salaries (Including the directors’ salaries)
The loans were granted with the understanding that you would still need to pay your staff. As well as your staff, they understood that you, as a director, would need paying. This is particularly important if you are a one-man or woman band.
You were allowed to use the BBL funds for legacy debt. Legacy debt involves paying suppliers for products and services that allow your business to run.
Businesses could also have used the Time to Pay Arrangement, which allowed directors more time to pay off their debts.
Some directors used the bounce back loan to refinance expensive finance deals they had previously agreed upon. However, you should be extremely careful when doing this, as it could be seen as a preference payment if your business later enters liquidation.
The best thing you could have spent your bounce-back loan funds on is working capital, which is all about keeping the business going.
I used my bounce back loan for salary – what happens?
The bounce back loan was only to be used in ways that would benefit the business. Those who took the loan and invested the lump sum into stocks and shares may be accused of bounce back loan fraud. Additionally, using the BBL funds to buy personal assets will land you in trouble.
In contrast, those who took small percentages of money out and sent it to a personal bank account and used it as a salary should not face accusations. However, if the salary was not paid through PAYE, you may have incurred an overdrawn directors loan. This may occur due to you continuously taking money out of the business while not earning a profit. This was the case for many businesses during the pandemic, as they could not operate. Find out how a director’s loan account works.
You will be responsible for paying the overdrawn directors loan back if the business becomes insolvent, so it’s important to be aware of it. Find out what happens if you can’t afford to pay the loan back. Do not ignore it in the hope that it won’t be identified. Get in touch with us if you need help understanding your situation. We’re always happy to offer honest and confidential advice.
What are the different types of bounce back loan fraud?
There are different types of fraud associated with the bounce-back loan scheme, they include ‘soft fraud’, which is owners who have borrowed more money than they should have. For example, their annual turnover is £50,000 altogether, and instead of borrowing the amount they should have (£12,500), they have applied for £50,000.
Another type of fraud is ‘hard fraud’, which involves a bounce-back loan being deliberately defrauded. For example, a business owner who has impersonated an individual to apply for the BBL loans (false representation), an owner who has applied for multiple bounce-back loans with different lenders or an owner who has used people to take out loans after liquidating the company or filing for bankruptcy. If you applied while knowingly providing false information, you will face the consequences of fraudulent claims.
Some directors found themselves waiting longer to benefit from the bounce back loan scheme. This led to some applying for the loan with another lender. When the money arrived from both banks, they may have spent it all. The right thing to do would have been to contact the bank and let them know you no longer need the money. Failing to act appropriately at the time could lead to severe consequences for you, such as director disqualification or criminal prosecution. If you did this, it will be picked up by the national investigation service.
Misuse of bounce back loans – what are the consequences?
Being found guilty of bounce-back loan fraud offences could mean that you face the following serious personal consequences:
- Confiscation orders
- Company director disqualification
- Fines & personal liability for bounce-back loans
- Civil recovery orders
- Civil settlements
- Civil penalties
If you know that you have committed some kind of fraud with the bounce-back loan scheme, the best thing you can do is get in touch for advice as soon as possible. The banks are working hard to recover fraudulent loans. Find out what happens if you don’t pay your bounce-back loan.
I applied for a bounce-back loan with the wrong turnover – what do I do?
The most common issue of bounce-back loan fraud comes from those who thought they could give a projected turnover instead of their actual turnover.
It was only those who began operating after the 1st of January 2019 that were advised to give a projected turnover due to not operating for long enough when applying for the loan. This meant many business owners inflated their company’s turnover and failed to meet them.
If you applied for the bounce-back scheme with the wrong turnover, you should be prepared to pay some of the money back. The banks are assessing applications for fraudulent loans and requesting money back from company directors.
Bouncing back after the loan
If you’re in a position whereby you can afford to pay back your bounce-back loan each month, then you’re likely feeling quite at ease. However, this has not been the case for some businesses, and loan repayments are a real struggle.
Upon applying for the loan, businesses were not asked to declare whether or not they believed they would have bounced back in the 12 months following the application. This means some business owners may not have even considered this. Struggling businesses are now feeling confused as to what to do next.
I acted responsibly, and I can’t pay back the loan – what do I do?
The sad part for many business owners is that they applied for the correct amount of money and have tried their hardest to carry on, but their business is still experiencing financial difficulty. If this is the case for you, then do not panic.
You will not be accused of wrongdoing if you can prove that you have acted responsibly and took out the loan when the business was ‘financially sound’. This means the business was not experiencing any financial hardship prior to the pandemic.
If you genuinely believe you can’t repay your bounce back loan, you should consider entering a liquidation process. If your money has been spent on trying to keep the business afloat and it has not worked, liquidation will mean that the government will pay your bounce-back loan back to the bank that issued it, and you will not be pursued personally. All unsecured, outstanding debts in a liquidation are written off. Read about what happens to directors in liquidation.
Our advice if you can’t pay back the bounce back loan
We recommend that you seek support early and do not continue operating if you know you cannot pay back your debts. Continuing to trade when you know you cannot afford to could lead to accusations of wrongful trading or trading while insolvent. This could mean you will be made personally liable for some or all of the company’s debts.
Knowing what to do in this situation can be difficult, and we understand that talking about money is not always easy. The most important advice we have if you’re worrying about bounce-back loan fraud checks is to act fast. If you know that you will struggle to pay back your debts, seek business debt advice. Most directors we speak to leave the phone call feeling relieved.
If you know you have acted irresponsibly, you need to seek advice. Problems with the bounce-back loan scheme will not go away on their own.
Bounce-Back Loan Fraud FAQs
Can 1st Business Rescue provide assistance to businesses dealing with bounce-back loan fraud?
Yes, we can provide advice on all aspects of business debts. We’re here to support you as the director. We ensure that all elements have been assessed before you enter any insolvency proceedings so there are no surprises down the line.
What are the legal consequences of bounce-back loan fraud?
Some legal consequences can involve monetary penalties, disqualification as a director, and even imprisonment. Seek advice early before it gets to this stage.
I’m worried I may have fraudulently used my Bounce Back Loan – What can I do?
The best thing to do is seek advice from a professional. This is a stressful time, but it will only worsen if left. Get in touch with our insolvency experts for advice.
What are the possible penalties for bounce-back loan fraud?
The penalties for bounce-back loan fraud will vary depending on the severity of your actions. If you are worried about fraud, you need to seek advice as soon as possible. Seeking advice early may position you in a better light, as you have been honest. Here are some possible penalties for bounce-back loan fraud.
- Confiscation orders
- Company director disqualification
- Civil recovery orders
- Civil settlements
- Civil penalties
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
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