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To help UK plc cope with the unprecedented economic turmoil and start-stop shutdowns caused by the Coronavirus (COVID-19) pandemic, the Government has had to borrow hundreds of billions of pounds.
A significant part of this cash was funnelled directly into the bank accounts of small businesses via the Bounce Back Loan Scheme.
Given how well known the scheme is, it might surprise you to hear that, every week, we receive a surprising number of email from experienced businesspeople whose question to us is “how do you pay back your Bounce Back loan?”
However, it shouldn’t be surprising that there is such uncertainty around this subject. That’s because the Bounce Back Loan scheme was launched in such a hurry – Rishi Sunak and HM Treasury in effect ripped up many different rules books especially in the area of borrower eligibility criteria in order to get money out as fast as they could to small business owners.
Recent developments have made accountants wonder whether it’s wise to advice their clients to repay Bounce Back Loans in full if they have the spare cash in their accounts. We’ll tell you why later in this article.
But, to start off with, let’s look at what we know for definite about repaying Bounce Back Loans and what the options available are that are available to you.
What is the Bounce Back Loan Scheme?
On the 4th May 2020, applications to borrow money from the Government’s new Coronavirus Bounce Back Loan Scheme (BBLS or CBBLS) were invited by HM Treasury.
Bounce Back loans were to be distributed through a nationwide network of traditional and start-up banks and financial services firms which had partnered with the British Business Bank plc.
After receiving criticism for the first round of Coronavirus-related loan schemes because of the requirement for directors to personally guarantee them, HM Treasury announced that all Bounce Back loans were subject to a 100% government backed guarantee protecting the banks from bad debt caused through borrower default.
As all Bounce Back loans came with a government backed guarantee, no personal or director guarantees would be required by the Government or lenders from borrowers. In fact, if a limited company was to apply for a Bounce Back Loan, lenders would even consider paying the funds into a personal current account if there was no separate business bank account (although this is not seen as best practice.
What was the original Bounce Bank Loan offer?
Under the Bounce Back Loan Scheme, small limited companies could borrow between £2,000 and £50,000 and the cash would arrive in their bank account within a few days.
There would be an annual interest rate of 2.5% (calculated daily on the amount you owe) on the loan but interest would not be applied during the first year with HM Treasury paying the first years’ interest. In fact, there is no loan repayments for the first 12 months either.
The original loan term was for five years after the initial interest-free period (although this can now be extended as we discuss below). Your first repayment would be in month thirteen with monthly repayments to be made thereafter.
How much could you borrow? You could apply for a loan between £2,000 and £50,000 – the maximum amount was 25% of your regular annual turnover.
From 10th November 2020, in addition to your original application for a Bounce Back Loan, you could also apply for a top up loan as long as the total sum of all Bounce Back loans taken out did not exceed a total amount of £50,000 or 25% of your annual turnover.
Unlike with the original loan though, your first repayment on the top up would not be collected in 12 months’ time. Your top up payment holiday would end on the first anniversary of your original loan.
Bounce Back loans were closed to new applications from 31 March 2021, replaced by the Recovery Loan Scheme
Can I repay my Bounce Back Loan early?
You can make early repayment in part or full of your Bounce Back Loan. Even better, unlike many commercial loans and residential mortgages, there are no early repayment charges to be paid at any time either.
Indeed, quite a few of our clients have taken out a Bounce Back Loan in case they needed it, as we didn’t know what was going to happen, but are looking to repay it in full/in part before any interest becomes chargeable.
What is the Pay As You Grow scheme?
Recently, the Government has announced “Pay As You Grow” – a scheme which offers borrowers extra time and flexibility to pay back their Bounce Back Loans.
This is ideal if you need more time to return to regular turnover and profitability levels and you need financial breathing room before you can start to repay the Bounce Back Loan.
In addition to the first 12 months where no monthly repayments are required, borrowers may now take the option of an extra repayment holiday of an additional six months at the time when they’re due to start to repay the loan.
Alternatively, they can instead ask to take the repayment holiday option of six months at any time during the remaining term of their loan.
Another new Pay As Your Grow option is that borrowers can ask to reduce their monthly repayments for six months by paying interest only. You can request this facility up to three times during the remaining time left on your loan.
And finally, borrowers can request that their loan term be increased from six years (including the initial 12 months during which no monthly repayments are required) to ten years keeping the same interest charge of 2.5% per annum.
How do I access Pay As You Grow?
Within three months of your first monthly repayment, your lender will contact you to ask you if you wish to take any of these options up initially.
If you wish to apply to the Pay As You Grow scheme, you’ll need to wait for the bank or financial institution you used to apply for your original loan to contact you.
Why you shouldn’t repay your Bounce Back Loan in full – our thoughts
What I am about to share with you is far from certain but I am just going to pass it on anyway.
According to the Association of Accounting Technicians (AAT), two thirds of the £40bn loaned through the Bounce Back Loan Scheme was lent was to genuine small businesses.
The AAT stated that there would be actually be a longer-term benefit to taxpayers by writing off all Bounce Back loans in their entirety because of the very high level of expected defaults.
Last November, the Office for Budget Responsibility (OBR) expressed their belief that taxpayers would be left with a £29.5bn bill from bad debts caused problems with the Bounce Back Loan Scheme.
In January 2020, the National Audit Office (NAO) predicted that £31bn of government loans handed out during the pandemic will have to be written off.
It’s all gone a bit quiet on the subject of expected defaults and what should be done about it except for the announcement of the Pay As You Grow scheme a week or two after the NAO’s predictions.
It seems like the Government is not yet ready to the logic of writing off the loans. Indeed, whenever the writing off of loans is discussed, the usual moral hazard arguments come up.
And, of course, there’s no guarantee that they will accept their recommendations.
Historic precedent (sort of)
I’m no historian but there exists a concept called a Debt Jubilee. In a debt jubilee, a country cancels the debt of the people and organisations which owe money to it. The tradition first appeared in ancient Babylonia and Syria and the number of occurrences of debt jubilee since then have been few and far between.
But what if Rishi Sunak called a Debt Jubilee for the businesses which took advantage of this scheme? And, until a jubilee is either officially confirmed or denied, would repaying your Bounce Back loan make sense, even if you could afford to clear it in full now from cash flow?
Rationale for not paying the Bounce Bank Loan in full yet
First, let’s get the obvious out of the way.
If your company has been back to regular levels of turnover and profitability for a while and you can afford to pay back your loan, what do you think the chances of the Government voluntarily handing back you back the money you’ve repaid if they call a jubilee?
Where’s the advantage in paying it back?
Second, even if they don’t, where is the sense in paying it back? What advantage will it deliver you?
Bounce Back loans were made to limited companies (no sole trader or self employed person could take advantage of it even if they wanted it to).
As directors of incorporated small businesses, we’re used to being required to take out personal guarantees on company debt.
But the Government made it a condition of lending that no directors had to sign personal guarantees for Coronavirus Business Interruption loans.
Even if your limited company goes under, you won’t be personally liable to repay the Bounce Back loan (except for cases of wrongful or illegal trading but, even then, that’s not clear).
There may be another wave or multiple waves of COVID-19 in the future. After the mistakes made with the Bounce Back Loan Scheme, it’s unlikely to offered again in this form.
Doesn’t it make more sense to keep the money in your bank account in case there is another emergency because you might really need it then?
Having the loan will impact the position of your Balance Sheet and therefore could impact your borrowing capability, but would you be able to get better terms on the open market if you needed further borrowings?
Has the pandemic presented you with an opportunity?
Third, the pandemic has been trying on us all.
The Government has given us several lots of cash help during the crisis in addition to the furlough and other schemes:
- the business interruption payment in the form of grants based upon our premise’s rateable value; and
- the Bounce Back Loan scheme (or Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS) for larger companies).
For some businesses though, turnover is near normal again and profitability is creeping up. The economy is expected to recover to its previous size within 12 months.
In all my time as an accountant, one of the hardest challenges many of my clients have had is to find the money they need to grow their business – to upgrade their website, to invest in plant and machinery, to hire new staff, and so on.
If you borrow money normally, it’s your house on the line because of the requirement to sign a director’s guarantee as we mentioned above.
And business is so competitive these days that it’s really difficult to increase trade to the levels required to create the free cash flow required to pay for:
- expansion or investment in the first place; and/or
- the often associated higher ongoing fixed costs as a result of that expansion and investment.
Is the Bounce Back loan the funding you’ve actually been waiting for all these years? Just a thought…
Wrongful use of a Bounce Back Loan
One area where we have big concerns this year is where the Bounce Back Loan has been used for the wrong purposes.
For example, if your business has received a Bounce Back Loan and you have ‘borrowed it’ for your personal use then you could legally have to pay back what you have borrowed. This could put your personal assets at risk if you have spent the money. There were some high profile examples of Directors going out and buying sports cars with their loans.
If you compound this with a business which has falling profits, it could create a lot of overdrawn directors loan accounts, which could cause s455 charges at 32.5% of the overdrawn amount, which will further hurt cashflow (even through it is a ‘bond’ which HMRC repay as soon as the overdraft is repaid).
This is why some have called it the ‘bouncing bomb’.
Bounce Back Loan repayments QuickFAQ
Where can I see a list of the lenders who took part in the Bounce Back loan scheme?
All banks and financial services which partook in the Bounce Back Loan Scheme are listed on the website of the British Business Bank plc.
What happens if you don’t pay back a Bounce Back Loan?
Probably nothing. Your personal assets are not at risk and, while your company credit score may be affected, not paying it back will not affect your personal credit score. However some banks have indicated that the presence of a Bounce Back loan default on a credit score would influence their decision to lend further money to a company. This is however not entirely certain at this point.
Do you have to pay back a Bounce Back Loan?
You legally have to repay your Bounce Back loan but exactly how the government, HMRC, or banks will penalise you for not repaying the loan is unclear. As best practice we would recommend it, but as outlined above, there are some interesting factors which are still uncertain here.
Will a Bounce Back Loan be written off if I don’t pay it back?
In all likelihood, your company’s Bounce Back loan will be written off as all of your company’s other debts. We are currently unaware of any “test cases” to prove this however as this is all still new and the relaxing of the wrongful trading rules and others has meant these haven’t come to pass yet.
Liquidating with a Bounce Back Loan – is it possible?
To the best of our understanding, the Bounce Back loan will be classed as an “unsecured debt” by insolvency practitioners. Under the rules of the Bounce Back Loan scheme, banks and financial institutions were not allowed to have ‘first lien’ or secured charge linked to the loan so your loan provider will have to join the queue of creditors. It is still a genuine creditor and if the funds are there they will be paid, but it won’t impact the capital ratios of the banks as it is 100% guaranteed by the Government so how willing will they be to pursue the loans?
What about personal liability for bounce back loans?
It certainly doesn’t look like there is any although we would be interested to see how it’s treated in the case of wrongful or unlawful trading. Again, there are no case studies which can provide guidance to us at this moment. We will of course update you as we hear more.
Bounce Back Loan Scheme Black and White Action Plan
Before you know whether there is going to be a debt jubilee and before you decide whether to pay your Bounce Back Loan back in full if you have the cash or whether to apply for the Pay As You Grow scheme, get in touch with the team at Black and White Accounting.
Let’s plan a bespoke pandemic Bounce Back roadmap for your company – let’s start by asking where do you want to be in 5 years’ time from now?
When you contact us, we will:
- Ask you where you want to be in 2026 – tell us your business goals for the next five years
- Examine your cash position – how are you financially right now?
- Look at what’s due to come in and leave your bank account – are you in a stronger or weaker position than your cash position suggests?
- Find out where the market’s going – what do you think the important trends affecting your sector will be in the next few years?
- Level up against your competition – where do you need to catch up to your competitors?
- Figure out what’s affordable – we’ll take all that information and come up with most affordable and less risky plan to help you achieve your personal and professional financial goals.
We can also bring in one of our Strategic Partners to help the conversation.
Contact the Black and White Accounting Team
Black and White Accounting represents clients across the UK (and more widely). This has been a strange year for us all but we firmly believe that, with the right accounting partner, there’s a chance for you to move closer to your business goals as the economy bounces back regardless of whether there’s a debt jubilee or not. There remains a lot of uncertainty here, but we can give you the best available information to help inform what is best for you and your business.
To find out more about whether repaying the Bounce Back Loan is a good idea for your business and to plan what you could do with the money you have remaining, please call us on 0800 140 464 or click here to email us.
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