Bounce Back Loans: A guide for sole traders and company directors
- 26 Aug 2021
Introducing the Bounce Back Loan Scheme
The Bounce Back Loan Scheme (BBLS) was introduced in April 2020 and was designed to allow businesses to access finance more quickly during the Coronavirus pandemic. The scheme closed to new applicants and applications on 31 March 2021.
This article covers what the BBLS was, key features of the scheme, repayment of the loan and more. For more information on what support was made available to the self-employed during the pandemic, visit our Coronavirus hub.
What were Bounce Back Loans?
The BBL scheme was introduced by the government in April 2020, largely in response to the difficulty that small businesses were having in accessing the Coronavirus Business Interruption Loan Scheme (CBILS). Specifically, there were reports that the eligibility criteria and application process for the CBILS were proving restrictive and complicated, with banks reluctant to lend and even requesting personal guarantees for small loans.
To meet demand among smaller firms for financial support, the Chancellor Rishi Sunak announced the launch of a new scheme providing a "simple, quick, easy solution for those in need of smaller loans" – the so-called Bounce Back Loans.
Key features of the BBL scheme:
- Businesses could borrow between £2,000 and £50,000 – capped at 25% of your total turnover
- The government guaranteed 100% of the loan – no interest or repayments needed to be made in the first year, and the interest rate was fixed at 2.5% thereafter across all lenders
- The length of the loan was initially 6 years, but this can be extended to 10 years. You can repay early without penalty
- Lenders were not permitted to take personal guarantees or take recovery action over a borrower’s personal assets (such as their main home or personal vehicle)
- The borrower always remained fully liable for the debt
- The loans are delivered through a network of accredited lenders
As of 31 May 2021, there have been 2,094,858 applications for BBLs, of which 1,560,309 lending facilities have been approved worth a total value of £47.36bn.
Who was eligible?
To be eligible for the BBLS, businesses had to meet the following criteria:
- Demonstrate that the business had been adversely impacted by the Coronavirus pandemic
- Able to show that the business was not insolvent or in difficult on 31 December 2019
- Based in the UK
- Planning to continue trading at the time of application
Public sector bodies including schools and higher eduction institutions and banks, insurers and reinsures were unable to access the BBLS.
What could the Bounce Back Loan be used for?
The British Business Bank’s guidance stated that your business “must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital, and not for personal purposes.” However, this was a fairly broad definition and there were no strict guidelines beyond the specification that this must be used for business rather than personal purposes. It could be taken to include things such as payment for bills, business running costs, investment and wages.
Repayment of the Bounce Back Loan
No repayments or interest are due in the first 12 months after borrowing. After that, you will repay the capital owed in monthly instalments and interest will be fixed at 2.5% p.a. for a six-year term (or 10-year term if you opt for ‘Pay As You Grow').
You can make overpayments whenever you like, or repay the loan in full at any time, with no early repayment charges - even if you use Pay As You Grow.
Ultimately, as with any loan, there is a possibility you may not be able to repay the full amount. The British Business Bank guidance on what to do if you feel you are struggling to repay the loan is to speak with your lender, as they will have processes in place to support customers experiencing financial difficulties.
As stated above, lenders are not permitted to require personal guarantees for the BBLs. The Bank also states that for sole traders or small partnerships, “the terms of the Bounce Back Loan Scheme mean no recovery action can be taken over a principal private residence or a primary personal vehicle.”
If your business cannot repay the loan, the government guarantee will only be activated once the lender has chased you for what is owed.
As the BBLS (Bounce Back Loan Scheme) closed, IPSE praised it for the help it provided for the self-employed – but also warned of a “rising tide” of debt in the sector.
Pay As You Grow
When the BBLS was first launched, the repayment term was set to six years with a fixed interest rate of 2.5% p.a.
In September 2020, the Chancellor of the Exchequer announced that businesses with BBLs would be able to access ‘Pay As You Grow” (PAYG) – enabling them to:
- Request an extension to their repayment term to 10 years, from the original six months, at the same fixed interest rate of 2.5% p.a.
- Switch to interest-only repayments for six months – you can do this up to three times throughout the repayment term.
- Take a repayment holiday of six months during the repayment term, which is extended in line with the holiday – you can only do this once.
Lenders will communicate the PAYG options to borrowers around three months before their first repayments are due, at which point, borrowers can decide whether they need them.
Does PAYG affect your credit rating?
The British Business Bank say that using PAYG will not affect a borrower’s credit rating, but that but it may affect lenders’ future creditworthiness assessments:
“For example, when considering a request for additional funding a lender will take into consideration incomings and outgoings, including existing debt repayments such as the Bounce Back Loan Scheme facility. It will also consider a business’s total debt exposure, which will again include the outstanding Bounce Back Loan Scheme facility.”
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The self-employed have been hit particularly hard during the pandemic, with many excluded from government support. However, IPSE has been here throughout the pandemic, advocating on your behalf, member or not, and supporting our members with helplines, webinars and advice.