Can a COVID-stricken Business Walk Away from a Bounce Back Loan Debt?
As businesses plug their balance sheets with emergency COVID-19 support to replenish cash flow, trading restrictions continue to hamper seasonal trade, consumer demand and rock the financial stability of core UK industries.
While businesses recover from cash shortfalls and adapt to constantly shifting public health measures, the financial health of all sized businesses remains at serious risk. Larger businesses with naturally more cash reserves than smaller businesses are well equipped to withstand the pressures posed by the pandemic, however, the impact is likely to be grave following the withdrawal of government support. The Bounce Back Loan Scheme is due to be replaced by the Recovery Loans Scheme from April 2021, with applications closing later this year.
If your business can no longer stay afloat due to deteriorating financial health, what happens to your Bounce Back Loan debt and will you be held personally liable?
Understanding the Bounce Back Loan Scheme (BBLS)
A Bounce Back Loan is different to a traditional loan which would typically require a personal guarantee for the borrowing to be underwritten. Due to COVID-19, the government introduced the Bounce Back Loan scheme, guaranteeing 100% of the loan to lenders to remove personal risk for company directors. As a result, businesses can confidently access finance to withstand these unprecedented economic conditions.
As part of the eligibility criteria for a Bounce Back Loan, businesses must not have encountered pre-pandemic financial difficulty and should also be able to prove that they have been adversely impacted by the coronavirus pandemic.
Walking away from a traditional loan tied to a personal guarantee can have serious repercussions such as increasing your risk of personal insolvency and damaging your borrowing ability.
Bounce back loans were made available to replenish company cash flow and working capital. As consumer demand and footfall erase overnight, emergency support was introduced to help businesses of all sizes stay afloat. If utilised as prescribed, you should be able to liquidate your business as standard. However, if used improperly – this could impact the insolvency procedure.
Company overheads are likely to rise as loan repayments and interest commence 12 months after the loan is taken out, biting into company cash flow. If your business has exhausted each avenue in a bid to secure survival, you may be left with no option but to turn to company liquidation to protect creditor interests. Failure to do so could result in compulsory liquidation which can be triggered by outstanding creditors.
Personal Liability and Bounce Back Loans
Walking away from a traditional loan tied to a personal guarantee can have serious repercussions such as increasing your risk of personal insolvency and damaging your borrowing ability. A personal guarantee provides security to the lender in the event of non-payment, defaulting or insolvency, binding you to be held personally liable for the loan repayment. In this event, your assets will be at risk and your home could even be repossessed. By accepting a greater level of risk, the risk of bad debt is instantly reduced for the lender, opening up access to competitive loan terms.
In the unfortunate event of insolvency, you will not be held personally liable for a Bounce Back Loan as the loan is guaranteed by the government. As a Bounce Back Loan is an unsecured debt, the lender is an unsecured creditor. During an insolvency procedure, creditors will be paid in priority order, beginning with secured creditors. Once all available funds have been used to repay creditors, any outstanding debts, including unsecured debts will be written off upon company liquidation.
Jonathan Munnery is a partner at UK Liquidators, part of Begbies Traynor Group. Jon is a licensed insolvency practitioner with over 20 years of combined experience in all aspects of corporate insolvency and business turnaround.