Bounce Back Loans: guidance for contractors

The latest loan product available for businesses impacted by coronavirus is the Bounce Bank Loan Scheme. These are low-cost loans of up to £50,000, they are very accessible, and guaranteed by the government. But are they suitable for contractors and consultants?

Update: Bounce Back Loan availability has been extended to 30th November 2020, with new repayment options

What are Bounce Back Loans?

Bounce Back Loans are easily available, low-interest loans for businesses that “have been adversely impacted by the coronavirus”. 

  • They’re available for amounts between £2,000 and £50,000, limited to 25% of your 2019 turnover
  • They’re 100% guaranteed by the government and no ‘personal guarantees’ are required, which means for limited company owners, your personal assets are normally not at risk
  • They are free of interest and fees for the first 12 months, and for the first year you don’t have to repay any of the principal either – meaning there’s nothing to pay at all in the first year
  • The interest rate is fixed at 2.5%, and the total term is up to 10 years. There are no fees
  • They’re very easy to obtain from high street banks – a short application is required to self-certify eligibility, and the loan is generally deposited in your bank account within 24 hours
  • If you already have a Bounce Back Loan, and you’ve borrowed less than the maximum, you can now top up the loan. You’ll need to do this by 31st January 2021.

Pay as you Grow – repayment options

Under the new ‘Pay as you Grow’ scheme, all businesses that have taken a Bounce Back Loan will have the option to repay the loan over a period of up to ten years. There is also an option to move to interest-only payments for periods of up to six months (and this can be used three times during the loan period). You can also pause payments entirely for up to six months – you can only do this once, and six repayments need to have been made first.

With all of these options, you will end up paying more interest in total.

Are contractors eligible for Bounce Back Loans?

The eligibility criteria for Bounce Back Loans, amongst others is:

  • Your business was established before 1st March 2020, and you were “carrying on business” on 1st March (i.e. you’d started a company, and were trading, even if you were on the bench on the 1st)
  • Your business has been adversely affected by coronavirus (COVID-19)
  • Your business is not in the process of bankruptcy, debt restructuring proceedings, liquidation or similar
  • You don’t already have a Coronavirus Business Interruption Loan
  • Your limited company is incorporated in the UK
  • More than 50% of your company’s income comes from trading (as opposed, to say, income from investments)
  • That you will “use the loan only to provide economic benefit to the business, and not for personal purposes”

Running through this list the answer is straightforward: most contractors and consultants will qualify for a Bounce Back Loan.

A typical scenario for many contractors right now is being benched as a result of IR35 in Q1 2020, followed by coronavirus stalling the contracting market. It would appear reasonable that your business has been impacted by coronavirus. If your typical daily rate is £450/d, with 46 working weeks in the year, your turnover would be £103.5k, meaning you would be eligible for a loan of up to £25,875. 

Should I take out a Bounce Back Loan?

Remember, this is a loan, not a grant. Taking on debt requires careful consideration of your ability to meet any future repayments. The challenge is that your circumstances are unique to you, and no two contractors are the same. 

For example, if you have business outgoings that need to be paid (like an office, insurances, IT infrastructure, etc), and you’re confident that client demand will return, the Bounce Back Loan may be a low-risk form of debt. For those who are more optimistic, it may be that a Bounce Back Loan could provide useful funds to invest in projects that will safeguard your post-CV19 viability and ultimately, success.

If, however, you have low overheads, are facing a personal financial crisis and are not confident client demand will return in the near-term, the decision is harder. In this latter case, we recommend that you start by examining your personal finances first. There are additional risks in using a Bounce Back Loan to pay yourself dividends (see following FAQs).

The overarching challenge is that this is a particularly hard question to answer, given the future is uncertain: we simply don’t have a benchmark against which the impact of CV19 can be assessed. Therefore, take some time to step back and consider the risk and alternatives before committing to debt.

What happens if I can’t repay the debt?

As a limited company owner, you are not required to make any personal guarantees on a Bounce Back Loan. This means, should your company enter Creditors’ Voluntary Liquidation (this is where you, as a director, decide your company cannot repay its debts) then the responsibility for repaying this loan rests with the company. This means the liability for repaying the debt cannot be transferred to you personally as a director or shareholder. In most circumstances, there is no risk to your personal assets or individual credit rating should your company not be in a position to repay the loan.

But there is a caveat.

When you take out a Bounce Back Loan, you have to self-certify that your company meets the eligibility criteria – including that your business has been genuinely impacted by coronavirus, and that you will “use the loan only to provide economic benefit to the business, and not for personal purposes”.

Should your company enter liquidation, the insolvency practitioner will (on behalf of the lenders) look to establish if you have broken the terms of the loan. If you have, you may be personally liable for the loan – known as ‘lifting the corporate veil’.

Whilst the government is guaranteeing the loan, lenders are expected to attempt to recover the debt from the business in the first instance. Given the volume of Bounce Back Loans issued and the potential risk of defaults, we expect that lenders will establish targeted processes to test if loan conditions have been broken.

Therefore if your company already has other loans, or if you’re considering using a Bounce Back Loan whilst still paying dividends, we highly recommend you consult with a licenced insolvency practitioner first. They will be able to help you understand and mitigate any potential risks.

Can I use a Bounce Back Loan to buy personal assets or consolidate personal debt?

Absolutely not. 

I’ve taken out a Bounce Back Loan, how do I record this in my accounts?

If you’ve taken out a loan please contact us and let us know – we’ll take care of ensuring it’s accounted for correctly in your company’s accounts.

I have cash reserves from which I’m paying myself dividends and am using the JRS. Can I apply for a BBLS?

Yes, provided the loan is treated for the purposes intended – to support the business and not for personal gain.

Can I use a Bounce Back Loan to pay dividends?

Profits are the source of dividends and a loan is not profit, so the loan cannot be paid out as dividends. The exception could be for cashflow – if your company has made a profit, therefore, has the option to pay dividends but doesn’t yet have the cash, the loan could be used to help with cashflow. It’s important to understand your circumstances and the impact this decision may have.

The next page in this series has specific tax advice on Bounce Back Loans and paying dividends.

Can I use a Bounce Back Loan to pay salaries?

If for any reason you or employees continue to work and you’re not furloughed, then the loan can be used to pay salaries. Be sensible though as a sudden jump in salaries could be seen as covering falling dividends and land you in hot water with lenders or HMRC.

I’ve already applied for CBILS, can I still apply for a Bounce Back Loan?

If you’ve already claimed under CBILS then you can’t claim under BBLS. However, if you’ve already received a loan up to £50k under CBILS you can transfer it to a BBLS. This must be done before 4th Nov 2020 and you should contact your lender to discuss this.

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