What does happen if you default on a bounce back loan? The National Audit Office reported that a worrying number of businesses will default on the government backed loan scheme, which could cost the British Business Bank and the UK economy up to 26 billion.
If you are thinking of taking out a Bounce Back Loan but are worried about what would happen if you defaulted on the payments, then this article is for you.
Defaulting on a Bounce Back Loan means that you have failed to make the required repayments on time. This will result in the loan being classified as an impaired loan, and the lender will take steps to recover the outstanding amount.
The first step will usually be to send a notice of default, which gives you 14 days to bring your account up-to-date. If you do not do this, then the lender may take further action, such as appointing a debt collector or taking legal action.
In some cases, the lender may also report the default to credit reference agencies, which could damage your credit rating. Therefore, it is important to make sure that you can afford the repayments on a Bounce Back Loan before taking one out.
Business owners that think there is a possibility of defaulting on their loans should seek early advice about the consequences and your options.
What is a default on a Bounce Back Loan
A Bounce Back Loan default occurs when a borrower who has taken out a Bounce Back Loan fails to fulfill their repayment obligations. The Bounce Back Loan scheme, as per its terms, initially provided some benefits to borrowers. During the first 12 months, the government covered the interest payments and any charges imposed by the lender. Furthermore, businesses were not required to make any repayments during this initial 12-month period.
Following this initial grace period, the loan’s interest rate was set at 2.5% per annum. Borrowers had the option to repay the loan early without incurring any additional fees.
If a business, after this initial grace period, fails to meet their repayment obligations, they are considered to be in default on the loan. The specific actions taken in response to this default depend on the terms and conditions of the loan agreement. Possible consequences could include legal action, debt collection efforts, or the business being required to negotiate a repayment plan.
Since these loans are government-backed, the lender also has the option to claim the defaulted amount from the government guarantee.
Understanding What it Means to Default on a Bounce Back Loan
In addition to the attractive low-interest rates, the primary appeal of the Bounce Back Loan Scheme (BBL) was its omission of the requirement for personal guarantees. While this feature made the scheme more enticing, it also increased the likelihood of defaults.
The absence of personal guarantees implies that, for directors of limited companies, there is a safeguard provided by the inherent limited liability structure of the LTD company.
If a borrower defaults on or fails to repay the BBLS loan, the lenders will be compensated for their losses by the government, as HMRC has extended its support to ensure the financial security of this scheme.
However, it’s important to note that this doesn’t mean borrowers can simply evade their repayment responsibilities. HMRC is currently in the process of updating its guidance to lenders on the proper procedures for enforcing loan repayments. Similar to many of the hastily enacted legislations during the COVID-19 pandemic, there are gaps in the available information regarding debt enforcement protocols.
At present, HMRC advises lenders to pursue any loan defaults using their usual methods, which may include sending warning letters, issuing statutory demands, and potentially resorting to court action and bailiffs if necessary. Whether or not lenders will find these measures practical or feasible given the expected volume of defaults remains to be seen.
Read also: Can You Write Off A Bounce Back Loan?
Consequences of Defaulting on the Bounce Back Loan
If your business finds itself in a situation where it simply cannot afford to repay the bounce-back loan, it’s crucial to recognize that this may be a sign of insolvency. It’s essential to approach this situation with careful consideration due to the serious implications involved.
Insolvency can be defined as the inability to meet financial obligations when they are due or having liabilities that exceed your assets. Failing to repay a bounce-back loan is a strong indicator that your business may have reached this state, although it’s advisable to consult with your accountant, reach out to us, or utilize our convenient insolvency test for a definitive assessment.
In the event of insolvency, as a company director, you have a legal obligation to prioritize the interests of creditors. This means you should:
- Seek professional guidance promptly from a licensed insolvency practitioner.
- Familiarize yourself with the responsibilities of a director during insolvency.
- Exercise caution when it comes to making payments to anyone, including yourself.
- Maintain thorough records of all actions taken during this challenging period.
However, if you are facing difficulties in meeting the monthly loan repayments but your business is otherwise solvent, the UK government provides several options:
- Extend the loan term from 6 to 10 years.
- Take advantage of up to 3 periods of 6 months with interest-free-only repayments during the loan term.
- Request a 6-month repayment holiday, which is available once during the loan term.
Options for Businesses in Bounce Back Loan Default
When a business faces defaulting on a Bounce Back Loan, there are several potential avenues to explore for resolution:
- Communication with Lender: The business should proactively engage with the lender to open a dialogue about the situation. Transparency and honesty regarding the company’s financial state can foster a collaborative approach towards finding a solution.
- Renegotiating Loan Terms: In many instances, the lender may be amenable to renegotiating the loan terms. This could involve extending the repayment period or reducing the interest rate. Lenders often prefer assisting businesses in getting back on track with repayments rather than dealing with the costs associated with a default.
- Payment Plan or Forbearance: Negotiating a payment plan can be an effective strategy. This entails making smaller, more manageable payments over an extended period. Alternatively, the lender might offer a period of forbearance, allowing the business a temporary pause or reduction in payments to regain financial stability.
- Debt Consolidation: If the business has multiple debts, it may be beneficial to explore debt consolidation. This involves taking out a new loan to pay off existing debts, often with more favorable terms such as a lower interest rate or a longer repayment period, making the debt more manageable.
- Professional Advice: Seeking guidance from professionals such as accountants or debt specialists can provide valuable insights into available options and help the business make informed decisions about its financial future.
- Insolvency Proceedings: In severe cases where the business cannot meet its debt obligations, it may be necessary to consider insolvency proceedings. This could involve various measures, including administration, liquidation, or a Company Voluntary Arrangement (CVA). Consulting with experts in this field is crucial to navigate the complexities of insolvency effectively.
Please keep in mind that each situation is unique, and the best course of action will depend on the specific circumstances of the business. Consulting with financial professionals and experts in insolvency can be particularly beneficial in determining the most appropriate path forward.
Lender’s Actions on Default
When a business experiences a default on its Bounce Back Loan, the lender, which is typically a bank or another financial institution, will take a series of steps in an attempt to recover the outstanding debt:
- Notification of Default: Initially, the lender will usually send a notification to the business, informing them of the loan default. This notice typically includes information about the default amount, any accrued late fees, and potential penalties.
- Attempt to Renegotiate Terms: In many cases, the lender will seek to collaborate with the business to modify the loan terms. This could involve extending the repayment period, reducing the interest rate, or making other adjustments to facilitate more manageable repayments.
- Debt Collection: If renegotiation proves unfeasible or the business continues to default on the loan, the lender may choose to enlist the services of a collection agency. The collection agency will take over the efforts to recover the debt, which may include employing legal measures.
- Legal Action: In certain situations, the lender may decide to pursue legal action to reclaim the debt. This could entail taking the business to court or seizing assets to cover the outstanding amount.
- Claiming the Government Guarantee: Since Bounce Back Loans are backed by a 100% guarantee from the UK Government, the lender has the option to claim the defaulted amount from the government. However, it’s crucial to understand that this does not absolve the business of its debt obligations. The business remains legally obligated to repay the loan, and collection efforts may continue.
- Reporting to Credit Bureaus: Lenders typically report loan defaults to credit bureaus, which can have a detrimental impact on the business’s credit score. A negative credit report can affect the business’s ability to secure future financing and may have other adverse consequences.
It’s important to emphasize that the specific actions taken in response to a Bounce Back Loan default can vary based on the lender’s policies and the circumstances of the default. Seeking professional advice and exploring options for repayment or negotiation is advisable for businesses facing loan defaults.
Are you Personally Liable if you Default on a Bounce Back Loan?
No, the Bounce Back Loan Scheme (BBL) did not require the conventional document known as a personal guarantee, which asserts personal liability. Consequently, in most cases of default, the serious potential consequences typically associated with personal liability, such as bankruptcy, should not apply.
It’s worth noting that the sister scheme to BBL, the Coronavirus Business Interruption Loan Scheme (CBILS), had some variations. Some accredited lenders under CBILS did request personal guarantees, but no BBL lenders were permitted to do so.
However, there are certain exceptions to the absence of personal liability in BBL defaults:
- Using the Loan to Pay Off Another Loan: If the BBL was utilized to pay off another loan that included a personal guarantee, this action is referred to as “showing preference” and could potentially be seen as fraudulent.
- Taking the Loan while Insolvent: If the loan was taken out with the knowledge that the company was already insolvent, personal liability may still be a concern.
- Wrongful or Fraudulent Trading: If directors engage in wrongful or fraudulent trading or other directorial misfeasance, they may be personally liable.
- Abuse or Inappropriate Use: If there is evidence that directors abused the loan scheme or used the funds inappropriately, personal liability could come into play.
While BBL offered significant advantages to businesses, it’s essential for company directors to act responsibly and within the bounds of the law to avoid personal liability in these exceptional cases. Consulting with legal and financial experts can provide valuable guidance to ensure compliance with the scheme’s terms and legal obligations.
Closing the Business after Bounce Back Loan Default
If a situation arises where a business finds itself insolvent and opts for voluntary liquidation, it’s possible to discharge the Bounce Back Loan as well as other company debts.
Under UK insolvency law, company directors have the opportunity to close their business and embark on a fresh start once the liquidation process reaches its conclusion.
For directors operating limited companies who are grappling with mounting debts, there are several available options. These might include pursuing a business rescue process, such as a Company Voluntary Arrangement (CVA), or selecting voluntary liquidation if the business is no longer considered viable.
If you’re seeking an open and practical discussion regarding any of these alternatives, don’t hesitate to get in touch with one of our experts at your convenience. We’ll provide you with insights into the process, timeframes, and associated costs. Our expertise lies in assisting smaller businesses navigate challenging financial circumstances.
It’s also important to note that if you’re concerned about the potential costs of liquidation, there are government redundancy payments accessible to directors. In some cases, these payments can serve as a lifeline, particularly when closing down an insolvent company.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.