Over the past few months, the government has introduced a number of measures to help struggling businesses survive the coronavirus pandemic.
Two examples of the state-backed loans on offer to help support business cash flow are the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme, with both loan schemes introduced to provide a source of emergency funding to help businesses survive these unprecedented times.
While the hope is that such support measures will enable companies to survive this difficult period, there will of course be some businesses that just won’t make it.
In fact, a recent report has suggested that the huge number of businesses set to default on their government backed loans will cost HMRC up to £26 billion.
So, if you’re a business owner and you are concerned that you won’t be able to pay back your loan, read on to find out what to do next, from a bounce back loan extension to payment holidays and other company rescue options…
What is a bounce back loan?
A bounce back loan is a type of loan offered by the government to help small businesses access emergency finance to help them survive the coronavirus pandemic.
Businesses can borrow between £2,000 and £50,000 with a government backed guarantee, and all loans are interest free for the first 12 months.
Once the 12 months are up, there is an interest rate of 2.5% and repayments can be stretched for up to 10 years. Bounce back loans have proved very popular, with estimates suggesting that more than 1.43 million loans have been issued since the scheme launched.
Do I have to pay my loan back?
In a nutshell, yes! Finance providers and HMRC will of course expect you to pay back the loan if it’s possible for you to do so.
In fact, bounce back loans were designed to be flexible and supportive and as such have some of the best loan terms that businesses have seen in a long time. However, the actual protocol by which lenders will follow up on loan defaults is a little unclear.
HMRC is due to update their guidance to lenders about the correct methodology for enforcing loan repayments, but whether it will be possible for lenders to pursue as many bounce back loan defaults as are likely to arise remains to be seen.
But what if I can’t pay it back?
If you are having difficulty repaying your bounce back loan or if you think you may run into problems doing so in the future, it’s important to seek advice from an insolvency practitioner as soon as possible.
If your business simply can’t afford to pay back your loan, you may have reached a state of insolvency – and as such, it is essential that you put your creditors first.
Yes, bounce back loans don’t require personal guarantees – which means as a company director, you are protected by limited liability. However, this doesn’t mean you can just simply not repay it.
Even though the government has temporarily relaxed regulations around wrongful trading in order to help business navigate the pandemic, misfeasance and preferential payment rules nevertheless remain in place, and great caution is required to avoid breaching your directors’ duties.
What’s the deal with preference payments?
If you have used your loan to repay yourself any loans that you introduced, or pay dividends when the company cannot pay its normal suppliers or creditors, this is called a preference – which is against the law according to the Insolvency Act 1986.
So, in layman’s terms, if your company cannot afford to repay your bounce back but you have used the loan to repay other loans, it’s a clear breach of your directors' duties. As such, under Section 239 of the Insolvency Act, you could be made personally liable.
So, what do I do next?
More often than not, the inability to pay the bounce back loan repayments is symptomatic of a deeper cash flow problem – and if other loans or creditors are building up, you should look at all the options available to you, such as a bounce back loan extension, time to pay arrangements, payment holidays or company rescue options.
5 options if you are unable to pay back your bounce back loan:
1. Payment holidays
Back in September, the Chancellor announced new Pay As You Grow measures for borrowers of the Bounce Back Loan Scheme.
Under these new measures, not only can borrowers extend the length of the loan to 10 years, but you can also choose to make interest-only payments for six months, with the option to do so up to three times in total. And, once six payments have been made, you can also request a six-month repayment holiday.
Using these options either together or individually could be just the thing to provide you with the extra breathing space you need if you are struggling to make repayments.
However, it’s important to remember that if you move to interest-only payments or take a payment holiday, you’ll end up paying more in interest overall.
2. Time to Pay
Another option if you are struggling to repay your loan is to request a time to pay arrangement with HMRC. A TTP arrangement allows you to pay back outstanding corporation tax, PAY/NI or VAT liabilities in instalments over the course of either six or 12 months.
Again, this could take the pressure off, which could in turn help you make your loan repayments on time. However, it’s important to bear in mind that HMRC must be confident that your company can make the full repayments before accepting a proposal.
What’s more, your proposal will need to be supported by evidence that your business is viable and able to pay off the debts in the proposed time.
3. Company Voluntary Arrangement
A company voluntary arrangement (CVA) allows insolvent companies to repay their debts in affordable monthly amounts. It’s a structured repayment plan that enables you to renegotiate debt whilst continuing to trade.
Once in place, all interest and charges will be stopped, and creditors cannot take further legal action against you. It’s essentially a way to ring-fence your business whilst you solve your financial problems.
When the CVA has been agreed, you will pay towards your business debts for an agreed period – and once that period is completed, your remaining debts will be written off.
4. Pre-pack administration
If your company is struggling to pay its debts but would be viable if it could be re-started, then pre-pack administration could be an option.
A legal insolvency procedure, pre-pack administration is a legitimate way of restructuring a struggling company that allows your business to be packaged and sold to a new company that is often controlled by the same directors.
A liquidator will be appointed to wind up your company, and a new company will then be set up who can then buy the assets and business from the original business.
Once sold, you can restart without your debts, effectively preserving an insolvent company in a new but essentially unchanged form. What’s more, your business can carry on trading during this process, too.
Finally, if the worst-case scenario is unavoidable and your business needs to close, a Creditors’ Voluntary Liquidation could be the right option.
Rather than waiting for your creditors to take action against you – such as by issuing a CCJ, a winding-up petition or hiring a debt-collector – a CVL will allow you to take control of the situation. It’s a quick and powerful way to close a business and deal with things legally and properly.
By closing the doors, dealing with the debt and cancelling any leases, all loose ends can be tied up so that the directors are free to walk away and get on with a new business. Find out what happens to your bounce back loan if you liquidate your company in this blog.
How McAlister & Co can help
If your business is struggling due to coronavirus and you are struggling to repay your bounce back loan, contact McAlister & Co today for FREE confidential advice.
From a bounce back loan extension to company voluntary arrangements, our experienced advisers have years of experience in business rescue and turnaround solutions and can offer impartial advice with no obligation. Don’t suffer alone; we’re here to help.