Bounce Back Loan Scheme – Do you have enough financial support?

March 3, 2021

Government financial support schemes during Covid pandemic

The Self-Employment Income Support Scheme was first brought in by the Government in response to the first Covid 19 lockdown. This scheme provides taxable grants to the self-employed who can relate the downturn in their business to the Covid 19 pandemic.

This is not to be confused with the Bounce Back Loan Scheme that was also introduced to alleviate the negative impact on trading due to the measures taken to control the impact the pandemic would have on the economy.

“Businesses are continuing to feel the impact of extended disruption and we are determined to give them backing and confidence they need”

Rishi Sunak, Chancellor

As the name suggests the Bounce Back Loan is a loan, not a grant, and whilst the scheme has certainly proved popular (860,000 loans were taken in the first week of the scheme alone), the potential ramifications of the loans both on the businesses that took them and the economy as a whole, is yet to be realised.

How has the Bounce Back Loan Scheme helped?

What cannot be argued is the Bounce Back Loan Scheme (BBLS) has provided unprecedented financial relief estimated to be from 48bn to 58bn (up from an original estimate of 18bn to 26bn in the first instance) for small and medium sized businesses. Loans have started at £2,000 and gone up to a maximum of £50,000 per application.

Statistics show that it has assisted the self-employed who did not qualify for the aforementioned taxable grant scheme. However, due to the loan status of the scheme, terms and conditions inevitably apply.  Given the speed that the loans were applied for and received, were the terms and conditions fully absorbed by the business owners that took them? For example, one such condition is that if the business is in default with any other lender, they are also deemed to be in default of their Bounce Back Loan. Is every business owner who took out this loans aware of this? Similarly, the loan must be used solely to support trading or commercial activity in the UK. The loan must also not be used for personal use.

Loans, dividends and solvency

Feedback from the Treasury, when asked whether such loans could be used in part as a dividend to shareholders, the answer was a resounding “yes”. Perhaps the answer should have been “yes- as long as your company is solvent”.

The reason solvency may play a part in the consequences of taking such loans are that dividends can be reclaimed from the directors personally should the company enter a formal insolvency process under certain circumstances. The test for insolvency is found at section 123 of the Insolvency Act and Rules 1986 (as amended) and it is important to note that they are independent of each other; that is a company only must fit one to be deemed insolvent.

An Insolvency Practitioner will investigate whether the Bounce Back Loan has been used for its proper purpose and if not then this may be grounds for a misfeasance claim against the directors personally.

“We know times are still tough for many companies and extra support is needed”

Kwasi Kwarteng, Business Secretary

Government loans and repayment plans

Despite the potential risks it can only be said that the Bounce Back Loan Scheme has been popular, but has the Government done enough to support businesses especially given the longevity of the second full lockdown in 12 months? Well, it was announced this week that the Government has provided more time in respect of the repayment of these loans rather than opt for further capital injection. In particular, allowing the loans to be paid back over a longer period i.e. a move from 6 to 10 years and providing for entitlement to a half year pause on repayments after 6 contributions.

Moreover, the Government has provided for an additional 6-month delay to the first contribution and has fixed the applicable interest rate at 2.5 percent. Therefore, business owners who borrowed the maximum £50,000 can now delay repayment for 18 months. As Business Secretary, Kwasi Kwarteng stated in response to these changes:

“The repayment options will give businesses the time they need to recover from the pandemic”.

Business loans – is it that simple?

If only it was that simple for many businesses owners who feel the Government has only scratched the surface when it comes to financial support over the last 12 months. At the time of writing this article the scheme is due to come to an end at the end of March.

The Government are expected to comment in their next budget review today, the 3 March. Whilst business owners are hopeful that such a scheme will be extended past the current deadline; could this be an opportunity for the Government to take a bespoke approach to support packages rather than a “one size fits all”?

This is particularly important given the diverse nature of the UK economy coupled with the fact that certain industries may suffer more than others well beyond the gradual alleviation of the current lockdown provisions; through no fault of their own.

Bounce Back Loans are just that, a loan with terms and conditions attached. How those loans are used may have ramifications in the future. Ultimately history will be the judge of the success of the BBLS, as aside from the inevitable fraud that follows schemes, there may well be ramifications for those that took the loans in good faith.

However, who has breached the terms and conditions and used the funds for purposes outside of those permitted? Will the scheme be a success for those people, and will it prevent a significant number of businesses entering formal insolvency which was one of its primary objectives? Only, time will tell.

Business advice on financial loans and insolvency

This article was written by Stephen Berry, a Partner at Opus. If you would like to have a confidential, non-obligatory chat with one of our Partners, about your business loans, please contact one of our Partners at your nearest office.

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