Will I Be Made Personally Liable For My Bounce Back Loan?

Bounce back loans were offered by the government at a time of great need. At the time they were created they held no personal guarantees which meant that the government would step in to pay the banks if need be. For many businesses, the hope of ‘bouncing back’ has not been achieved, so now, many directors are worrying ‘will I be made personally liable for my bounce back loan?

Will I be made personally liable for my bounce back loan: sole trader? 

If you are operating as a sole trader, unfortunately you do not have the same level of protection compared to limited companies. Sole traders are more on the line than limited companies. If you are a sole trader who has taken a bounce back loan and is now struggling to make the necessary repayments, you will be made personally liable for the bounce back loan because you took it. This means the banks will try to enforce this and attempt to collect their money. 

However, the banks are not able to take your primary residence or your car. This will have been outlined during the bounce back loan application. While the banks are unable to claim these possessions, they will do their best to collect the money from you. If you’re operating as a sole trader and you’ve taken a bounce back loan then you can be made personally liable. 

Will I be made personally liable for my bounce back loan: limited company? 

The short answer is no, as a limited company you should not be made personally liable for the bounce back loan, however, there are ways in which you can be liable. 

The formation of a limited company means that as a director, you are not the company. In the case of a bounce back loan, the business took the loan, rather than the director themselves. If the company closes for any reason, the bounce back loan will be classified as an unsecured debt which means that in a liquidation, that loan would be written off. At this point, the government would step in and pay the money to the bank. However, that will not happen in some instances. 

When will a limited company be personally liable?

If you took out a bounce back loan when you shouldn’t have, or you spent the bounce back loan on personal things rather than things that would benefit your business, then you could be made personally liable for the bounce back loan. 

Any of these things will put you at risk of being personally liable for the bounce back loan:

Inflated turnover

Some directors inflated their company turnover to increase the amount of loan they would receive. The terms and conditions of the bounce back loan were very clear in that you had to state your company’s turnover in 2019. This is all fine providing that your company was incorporated before 2019. If not, you were invited to provide a projected turnover. Some directors were confused by this and gave an estimation despite having access to accurate figures. Businesses were able to apply for a maximum of 25% of their 2019 turnover, with a cap of £50,000. 

If you have inflated your turnover to receive a larger bounce back loan, you have likely committed bounce back loan fraud, which could lead to issues and you will be personally liable for the loan. 

Inappropriate loans

A key term for receiving the bounce back loan was that you must use the money solely for the business. This means spending it on things such as staff wages, rent, bills and other aspects necessary for the business to remain afloat. 

Using the loan for items that do not benefit the company was not appropriate. This includes if you purchased a new car or used it for a house extension or a mortgage pay off. Do not assume that these things will remain hidden. A thorough director’s investigation will be completed to assess your financial situation and the lead up to your insolvency. If it is uncovered that you have used the money for your own personal benefit then you will be personally liable for the loan. 

Directors loan accounts

Another way in which you may inadvertently be liable for your bounce back loan is if you have used the money for a salary or to draw money from to top up your salary. This money usually comes from a directors loan account. Taking money from a directors loan account is usually fine providing that your business is making a profit. If your business is not making a profit and you continue to take money from it, you will end up with an overdrawn directors loan account

This means that you will owe the money back to the company. If you enter a liquidation process, you will be completely responsible for paying back this loan. It is very important that when you appoint an insolvency practitioner, you ensure that they have factored in the cost of your overdrawn directors loan account, otherwise you could end up in a lot of debt that you were not expecting. By the time it comes to being told about the debt further down the line, it will most likely be too late for you to do anything about it and you will have to pay back the money. 

If you’re worrying about anything that we’ve mentioned, don’t suffer in silence, we’re here to help and company directors often say they feel better after chatting to us.

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