The bounce back loan scheme has offered a lifeline to struggling companies over the course of the coronavirus pandemic. But as the scheme reaches it’s conclusion, it’s apparent that around £43bn that the Government lent, could potentially be lost. Launched May 2020, the scheme was designed to help provide cash quickly for struggling businesses, who could borrow up to £50,000 which is 100% government backed and doesn’t have to be paid off for 10 years.
So far the scheme has helped more than 920,000 small firms. However, the loose rules surrounding the loan and the criteria required to get a bounce back loan, have meant that it has been easy to expose and abuse through fraud.
What should I use my Bounce Back Loan For?
Bounce Back Loans are meant to help businesses with working costs and are there to make up for the lack of takings due to the effects of the coronavirus pandemic. They can be used for, but not limited to:
- Paying staff, suppliers, loans and running costs
- Marketing costs
- Investment into new production machinery and equipment
- Maintaining business cash flow
- Supporting directors’ income
For sole traders, you are able to take cash from the business, because you are the business and you are personally liable. You are responsible for paying the required loan repayments and you will be responsible if the loan can’t be repaid.
What shouldn’t I use my Bounce Back Loan for?
The prime purpose of the Bounce Back Loan is to help the economic benefit of the business and is not for personal use.
- Dividends – You cannot use a bounce back loan as a dividend as this must be paid from profits which the loan isn’t.
- Salary – The government-backed furlough scheme was fundamentally brought in to cover salaries, however, this means you shouldn’t be working. The loan can be used to cover your own salary, but shouldn’t be used as a reason to increase a salary as that might not be classed as being used to the economic benefit of the company.
- Loan to a director – The bounce back loan can temporarily be lent to a director, however, it need to be paid within nine months. If the company goes insolvent in that time, directors can be held personally liable if it’s within an overdrawn director’s loan account.
Have I misused my bounce back loan?
Simply put, the bounce back loan was introduced to support businesses and help them stay on their feet. Any directors who use the loan to fund their personal lifestyle, or to pay off any personal debts such as a mortgage are open to prosecution for fraud. The bounce back loan should not be used for paying dividends without a profitable balance sheet, increasing employees’ salaries.
Could directors of Personal Limited Companies use a Bounce Back Loan to cover living costs?
While companies received support from the furlough scheme to pay their employees, that help wasn’t extended to paying directors. If directors used the Bounce Back Loan to take a wage at a similar or lower rate than their pre-pandemic income, then it’s unlikely to be scrutinised. If the director owns a Personal Limited Company, where that director’s services are the company’s product, this would likely be considered reasonable.
If, by contrast, the director used the full £50k they could obtain from the scheme for their own personal benefit, then there might be cause for intervention.
Are you struggling to repay your bounce back loan?
Repayments on a bounce back loan don’t kick in until 12 months after the loan was taken and recently the government introduced the ‘Pay as you grow scheme’. This enables borrowers to extend the length of their loans from six to ten years, which could reduce monthly repayments almost in half. However, if you’re struggling to make the payments once they start, it could be a sign that your company is facing problems. If a bounce back loan is one of a few debts the company has, a formal repayment plan may help you to consolidate those debts in order to move forward.
Affordable Repayment Plan
A Company Voluntary Arrangement is a repayment plan designed to consolidate your debts into one affordable monthly repayment plan. It gives you protection from your creditors and gives you the opportunity to continue trading without creditor pressure, whilst repaying your debts.See more on how a Company Voluntary Arrangement works here
Liquidate the company
If you’re worried that the company is in a position which it can’t be saved, it’s important that you have all the right information so that you’re able to assess your options. We are a licensed insolvency practice and will be able to look at your company’s situation and provide free, confidential advice. This process is known as a Creditors Voluntary Liquidation (CVL).
- Speak with our initial advisers through phone or online chat.
- After initial assessment we will identify if your company is viable for liquidation.
- We will propose to you the liquidation of your company and undertake the necessary steps.
All advice is free of charge and if a liquidation is viable, it will result in the formal closure of your company and any unsecured debts will be written off.
The bounce back loan is there to support businesses as the pandemic continues to limit the trading and progress of businesses. However, it must be used in the proper way to help keep businesses trading. If misused it can result in directors or sole traders being held personally liable for the loan. If you have used your Bounce Back Loan correctly, contact us in the strictest confidence, and our initial advisors will guide you through your available options.
Book a free telephone consultation with one of our initial advisers