Where to begin
The recent global climate has had a significant impact on all aspects of our lives and none more so than the economic environment. The mandated closure of businesses has been an extremely challenging period for all of those affected, and has threatened a devastating impact on incomes and their future. What is clear today is that many businesses have not bounced back
What exactly is a bounce back loan?
The name is a true reflection of the loan’s intention as it is designed to enable SMEs to literally ‘bounce back’ once the effects of the pandemic allow trade to re-open. The government has favourably facilitating the lending of resources to promote this to enable companies to re-establish themselves as soon as possible. The lending occurs through a bank (usually your business bank), which is secured by the government.
What were the terms of a bounce back loan?
A Bounce Back Loan is targeted at smaller businesses as they are possibly more vulnerable than others in the current climate. A business will have access to a loan worth up to 25% of its turnover, to a maximum value of £50,000. If you inflated your turnover in order to apply for a higher bounce back loan amount then this could be classed as fraud and it’s imperative that you take advice on this early.
The loans are interest-free for the first year, and a fixed rate of 2.5% is subsequently applied for up to six years after that. The government secure the loans themselves, which offers a lower risk to the lenders. Now Bounce Back Loans are due for repayment and many businesses have not bounced back.
Talk about your bounce back loan
Lots of directors are now asking ‘What will happen to my Bounce Back Loan if I liquidate my company?’
The bounce back loan has been 100% guaranteed by the government which made it an ideal loan for the borrowers and the lenders.
The banks don’t take any risk because it’s guaranteed by the government and the borrowers didn’t need to sign a personal guarantee so they couldn’t lose their home or any other assets if they defaulted or liquidated.
In the event of a liquidation, the Bounce Back Loan of the company becomes treated as an unsecured debt. This means that the bank that provided the Bounce Back Loan does not have any substantial claim over company assets in the event of a liquidation. As a result of this, it is entirely likely that the Bounce Back Loan will be written off in the event of the company going into liquidation.
There will, of course, be a full HMRC bounce back loan investigation conducted, and the financial history will be reviewed. In the event of the review revealing the Bounce Back Loan has been misused, then there will most likely be repercussions such as being made personally liable for the loan.
But there are some caveats…
Bounce Back Loans and Personal Liability
There will always be a full investigation into the whole business, the finances and all the directors’ conduct so that any issues will be uncovered. Therefore, the directors’ personal liability will only change in the event of evidence that the loan has been misused against the rules laid out for them, which will be uncovered during the investigation.
Some circumstances were a director may be made personally liable for the bounce back loan are:
- Applying for the loan fraudulently
- Falsifying turnover when applying for the bounce back loan
- Paying the Bounce Back Loan to themselves personally
- Paying off finance and loans they had personally guaranteed
- Buying new cars, buying property or putting an extension on their house! We know you probably already know this last one but we thought it was worth pointing out again for the avoidance of doubt.
What can I use a bounce back loan for?
Here is were the problems can arise.
The money must be used in a way that will give your business what is known as an economic benefit, so there are certain restrictions in place as to how you can use the money. For example, the payment of salaries is acceptable, but the funds cannot be used to give pay rises. Dividends should also not be paid from the money unless a clear and adequate profit is recorded on the balance sheet prior. Generally speaking, the loan should be used as working capital and to improve general cash flow.
In certain circumstances, the loan can also be used to help with some existing borrowing in a refinancing capacity to help cashflow. However, to prevent any potential issues, the way it is used must be done with caution. For example, if you have a mix of personally guaranteed debts and unsecured ones, it would be unwise only to address those which have a personal guarantee with the money. Were you to do this; it could latterly be construed as making a preference as an act of misfeasance.
If you believe your business is in financial difficulty because of the pandemic, it is advisable to speak with an insolvency practitioner, such as the experts at 1st Business Rescue, who will help you navigate the challenging period. They will be able to advise on all the rules, the different funding available, and how you can best manage your finances to hopefully come out of the other side of the pandemic and regain business health.