Bounce Back Loans: A guide for sole traders and company directors
- 26 Aug 2021
Introducing the Bounce Back Loan Scheme
Despite an unprecedented package of government assistance for businesses to mitigate the economic impact of the coronavirus lockdown, many individuals still find themselves without support. As IPSE has highlighted, it is particularly groups amongst the self-employed community – company directors, newly self-employed sole traders or those with profits above £50,000 – who have slipped through the net of government support.
One option that the government introduced in April 2020 as a potential avenue for those who could not access the main Job Retention Scheme (JRS) or Self-Employment Income Support Scheme (SEISS) was the Bounce Back Loan Scheme (BBLS).
This article covers what the BBLS was, key features of the scheme, repayment of the loan and more.
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.
The BBLS closed to new applicants and applications for top-ups on 31 March 2021.
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 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.
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 is a fairly broad definition and there are no strict guidelines beyond the specification that this must be used for business rather than personal purposes. It can be taken to include things such as payment for bills, business running costs, investment and wages. You may be able to use the loan to pay off other business debts, but this is something you may need to check with the individual lender.
For limited company directors, you can use the loan to pay your salary – but there are obvious risks in thinking about using the loan to pay dividends or a director’s loan via the company. IPSE advise that you discuss specific uses and implications with a tax accountant or adviser if you are unsure.
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 – more on that later).
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.
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.”
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.
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IPSEIPSE is the leading association for contractors, consultants, interims, freelancers and the self-employed. We strive to bring our members the most comprehensive and useful range of information and services and all the latest news about what affects your business.