Bounce Back Loan Scheme: what you need to know

Applications for the Government bounce back loan scheme commenced on 4 May 2020 and to date 1.4 million businesses have collectively taken nearly £45 billion through this scheme.

Businesses could take a loan between £2,000 and £50,000 loans up to a maximum of 25% of their turnover and had to be established by 1 March 2020. The scheme to take the loans closed on 31st March 2021.

No repayments on the loans were required within the first 12 months, there were also no setup fees on these loans and no interest charged for the first 12 months. The interest for these loans was set at 2.5% during the period of the loan which is a very low rate.

The application for these loans was in most cases online with limited credit checks which has resulted in the large uptake of the finance and also suggestions of fraud which is likely to cost the UK taxpayer many billions.

The loans are unsecured and were able to be used to repay other finance and assist business that have been adversely impacted by the coronavirus in the UK. Therefore, there were no personal guarantees required for these loans.

Loan Repayment Terms

The loans were initially over 6 years, but it is possible to repay early without a fee and therefore some businesses have taken the loan on the basis if it is not needed then it can be repaid without any costs.

It is now possible to extend the term of the loan to a period of 10 years which will almost half of your monthly repayments but as this is over a longer period the actual interest you will pay will increase. This will give greater flexibility though as it will be possible to repay in full without any penalty to reduce the interest charge if business cashflow improves.

Also, for short-term issues with repayments on the loans it is possible, up to three times during the loan, to just pay interest only for 6 months or take a repayment holiday for 6 months once during the period of the loan. The 6 months can be before the first repayment therefore effectively giving 18 months before any repayments are required if this option is taken.

The banks are proposing to contact businesses within 3 months of the first repayment advising them of these options. The businesses that took the loans as soon as they were available should be receiving notifications from their banks.

Using bounce back loans to support income

Some financial commentators have suggested, for a large number of businesses which have been ineligible for the Governments income support schemes like self-employed individuals that earnt over £50,000 and people working for themselves through limited companies, this can be used to support income.

It is believed this is the case, but you need to ensure this is correctly dealt with within the records of the business to ensure that the funds are correctly used for the running of the business.

For sole traders/partnerships this is fairly straightforward as even though these loans are unsecured, as you are the business the loans are still repayable by you if the business fails to continue for any reason.

For limited liability Directors this is slightly more complex. A number of Directors pay themselves with a low salary and the balance by way of dividends. The dividend element needs to be paid out of profits made by the company. For companies that have retained profits from previous years to cover dividends there should be no issues, but if Directors are relying on current profits this could be an issue and management figures will need to be prepared to ensure Dividends are legal.

If for some reason the limited company does find it is unable to continue to trade and becomes insolvent when the Director has taken illegal dividends, they will owe these funds back to the company which can override the limited liability element of the company and the unsecured nature of the bounce back loan.

Also, the Director may find that they have an overdrawn loan account which will be liable to a tax rate of 32.5%.

Therefore, any Director that feels that he has an issue regarding the funds taken from the company should consult their accountant.

If you have any questions regarding the use of the bounce back loans or your business, please do not hesitate to contact GMP Accountants on bexhill@gmpaccountants.co.uk.

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