Even loans that are guaranteed have to be repaid
The loans were issued under the Coronavirus Business Interruption loan scheme (CBILS) and the later Bounce-back loan scheme (BBLS) for small and medium-sized businesses and have an initial 12-month repayment-free period with the first ones falling due for repayment from Spring 2021.
Early indications are that banks are looking to agree to a lighter-touch approach than they would usually employ for their own standard commercial or business loans.
The BBLS is 100% guaranteed by the government which means the state will reimburse the bank’s total losses if a customer defaults on their loan. CBILS has an 80% guarantee which would leave a bank looking at a 20% bad debt loss.
More than £40 billion was leant to over one million businesses under both schemes with most BBLS borrowers being small business owners or sole traders.
A spokesperson for the British Business Bank (BBB), which manages all the state-guaranteed loan schemes created as part of the coronavirus response, said: “The BBB has regular meetings with lenders, UK Finance, HM Treasury and others to discuss the operation of the government’s Covid-19 response to loan guarantee schemes.
“Among other topics discussed is the need to treat customers fairly should the collection of debts be required in the future.”
So far so standard, but there’s a critical point that’s been overlooked so far – and that’s what happens if the debt is defaulted on deliberately.
Some directors with a basic knowledge of insolvency might think that dissolving the company will free them from the burden of repayment, especially if the debt is already government backed. The implication from the code of conduct discussions however suggests that this will simply not be permitted.
Whilst taking a lighter touch in the debt collection processes, if the banks do not attempt any debt collection or simply allow directors to dissolve the companies, this may invalidate their guarantee, meaning the bank would suffer the loss. It’s not anticipated that the banks would risk this level of exposure.
Consequently if you have taken out a BBL or a CBIL you should expect to be required to either repay this in full, make an arrangement to repay a reduced amount as part of a Company Voluntary Arrangement (CVA) or enter liquidation if the company cannot be rescued.
Any company that thinks it might have difficulty making loan repayments or struggling with existing debt should take a moment and get in touch with us.
The coronavirus pandemic and response has been damaging for companies all over the country but the recovery period also provides an opportunity for businesses to take professional advice and help, and regroup.
We have years of individual and collective experience in helping businesses to restructure themselves in tough times and come out stronger, stabler and ready to re-engage with customers and creditors with added confidence.
If there’s ever a time to find out what we can do for you then it’s now.