Not many would have assumed that over a year after taking them that a large minority, if not majority in some industries such as hospitality, bars or nightclubs, would not have been able to begin trading at all in some circumstances, let alone fully.
We’ve covered the problems facing these businesses in earlier blogs as well as the small and closing window of opportunity for companies to implement rescue and restructuring plans ahead of creditor actions such as winding up petitions resuming and the CJRS furloughs ending at the end of September.
But what about sole traders and partnerships facing the same issues?
Limited companies have established legal protections that stop creditors from pursuing individual directors and owners for debts - unless a personal guarantee was given - but sole traders and partnerships don’t have this shield.
When applying for bounce back loans, the British Business Bank stated that sole traders and partnerships had to have been given sufficient information about the borrowing and incurred debts and repayments before any finance was given, under the provisions of the Consumer Credit Act.
If this wasn’t adhered to by the lender underwriting the agreement and providing the funds then they would lose their ability to collect repayments on the loan - although they would be expected to challenge this. The onus would be on the borrower to prove they hadn’t been adequately informed either at the time or during the course of the agreement.
The Consumer Credit Act doesn’t apply to the bounce back loan scheme in its entirety although not all of its protections were removed, meaning the information requirement remained and that the collection of the loans were still regulated meaning that lenders would still have to comply with the relevant regulations should borrowers encounter financial difficulties.
Additionally, lenders were not permitted to ask for or seek any personal guarantees for access to the bounce back loan scheme.
Sole traders and members of a partnership are often used to risking their personal assets when borrowing so would be reassured that under the terms of the bounce back loan scheme, no recovery action can be taken by lenders over either a principal private residence or a primary personal vehicle - their home or car.
This doesn’t mean that they cannot be pursued for outstanding bounce back loan debts or unpaid installments. Their other personal assets may still be at risk of recovery action from the end of September.
One other important caveat partnerships or sole traders who borrowed under the scheme should be aware of - they should not have been in financial trouble when they obtained the finance.
From September 2020, an additional undertaking was inserted into the bounce back loan borrowing conditions making this requirement clear.
The definition of a “business in difficulty” is that partnerships should not have accumulated losses greater than half of their capital in their most recent annual accounts - although this does not apply to firms three years old or less.
For sole traders the requirement was that they should not have been in an active insolvency procedure while they sought the funding.
The biggest problem for sole traders to overcome if they can’t repay their bounce back loans, is that legally, there’s no difference between personal and business assets. This means that any business debt is personally owed and therefore recoverable from personal assets.
Creditors can and will use high court enforcement officers or bailiffs to obtain whatever they can to sell and regain some of their funds.
These too are currently limited (although not if the company was considered insolvent before the Coronavirus lockdowns started in March 2020) but are scheduled to return within ten weeks.
If a sole trader is in financial difficulty and can’t make bounce back loan repayments or other debts then they have insolvency options but not as many as a limited company or even a partnership so it’s even more important that they get professional advice at the earliest opportunity.
Chris Horner, Insolvency director with Businessrescueexpert.co.uk said: “One of the main advantages of running a business as a sole trader or in a partnership is less administration and more agility than a limited company can supply.
“A drawback is that if they meet financial headwinds, then they don’t have the range of protection enjoyed by companies - they have more personal exposure.
“But this doesn’t necessarily mean the worst. If they take action early enough to satisfy creditors including bounce back loan lenders then they can still continue to trade, if viable, and repay their debts while they do it.
“Alternatively, they can take advantage of specific insolvency protection for sole traders or individuals called an Individual Voluntary Arrangement (IVA).
“It operates in a similar way to how a CVA or company voluntary arrangement operates for a limited company allowing them to pay off debt in a series of manageable monthly payments while a proportion of the remaining debt is written off.
“No matter what issues partnerships or sole traders might be facing - if they get professional advice quickly enough, they will have options to change course.”
The bounce back loan scheme might have been a new initiative but the problems if a partnership or sole trader can’t repay it is not.
Even though the scheme was government backed to encourage lenders to be more generous than they might otherwise have been to prospective borrowers, we’re seeing increasing evidence that recovery action is more aggressive and sustained than you may expect.
This is because the government is increasingly demanding evidence from lenders that they have made genuine efforts to recover any debts before they can even begin to apply to have their funds reimbursed.
Given this, if you think you might not be able to repay your bounce back loan or any other borrowing in full, or if you’ve missed payments already - you should get in touch with us as soon as you can.
We offer a free consultation for sole traders or partners where they can outline what issues their business is facing and we can listen and let them know, often to their surprise, that they can take action to save it.
The quicker they act, the more options they will have to choose from and more time to implement them effectively.
The clock is ticking down for creditors actions to be allowed again so why waste any more time?
When we published the first part of our series looking at the UK’s bounce back loan scheme earlier this month, it was to get a better view of the overall borrowing levels.
We found several official projections indicating that billions of pounds lent under the scheme would ultimately not be repaid, with the losses equal to the cost of building between six and 23 Wembley Stadiums from new.
For this final article in the series - we’re looking on a more local basis.
Which nations and regions saw the most demand for bounce back loans? Which areas had the most borrowing per capita and which parliamentary constituencies had the highest bounce back loan borrowing rates?
The data sources used to compile the various best and worst-case scenarios used in the projections are taken from the Office of Budget Responsibility’s Fiscal Sustainability Report; the latest BEIS annual report and the National Audit Office (NAO)’s regularly updated COVID-19 cost tracker.
The UK regional and parliamentary constituency lending breakdowns were compiled and published by the British Business Bank.
The number of businesses in each region was taken from the Department of Business, Energy and Industrial Strategy’s business population estimates.
Using this public data as our benchmark, we projected three different scenarios for bounce back loan scheme defaults as outlined within them.
The scenarios set out a best case (with a 15% bounce back loan default rate); a median case (40% default rate) and a worst case scenario (60% default rate).
Finally, the regional classifications used are the official Classification Of Workplace Zones (COWZ) administered by the Office of National Statistics
When talking about millions and billions of pounds, It can be easy to lose sight of what these figures mean for individual businesses.
Taking out a bounce back loan might have been the difference between closing down and remaining open at the time for many of the small and medium-sized businesses that are ultimately the bedrock of the UK economy.
We’ve collated the total amount each devolved nation and English region has collectively borrowed under the bounce back loan scheme as well as the overall number of bounce back loans taken out by businesses based in that area.
We also list the average amount borrowed by these companies individually, the ratio of businesses to loans in that area and the projections for default rates, based on our analysis:
While bounce back loans were supplied by banks and other lending institutions, because the funding was guaranteed, the amount lent was limited to between a minimum of £2,000 to a maximum of whichever was lower - £50,000 or 25% of the applicant’s 2019 turnover.
As might be expected then, the areas with both the highest number of bounce back loans taken out and the highest total amount of borrowing were London, closely followed by the South East of England.
But if we look at the ratio of local borrowing - which is the total number of BBLS loans approved for that location divided by the total number of businesses operating in an area - then the picture changes.
For instance, 27.5% of businesses in the North East, over one in four, applied for finance under the bounce back loan scheme, which was the highest demand in the country. But the average amount actually loaned per applicant was £26,751 - the lowest figure in the UK.
That’s nearly £7,000 less than a comparable London-based business that borrowed an average BBLS amount of £33,480, the highest average amount in the country.
27% of North West businesses applied for support funding, which were given £29,568 on average (nearly £3,000 more than their North East counterparts) while Welsh companies were the next most eager. 26.4% of businesses based in Wales took out bounce back loan borrowing to an average sum of £27,226 each.
Businesses in South West England had the lowest overall borrowing ratio with just over one in five (20.6%) applying to the scheme and taking £28,432 in bounce back loan lending support.
Businesses on the other side of the Irish Sea from the UK mainland in Northern Ireland saw the lowest overall number of bounce back loans taken out with just over 38,000 approved - nearly eight times less than the amount applied for by London based companies.
Northern Ireland also saw the least amount of total borrowing too with £1.1 billion lent, although even this total could be subject to defaults in the range of £165 to £660 million depending on the ultimate level of defaults occurring.
We’ve taken a deeper dive into the available data and analysed bounce back loan scheme lending according to the makeup of each of the UK’s 650 parliamentary constituencies.
Regional and national data gives us a good understanding but we can see how the story looks even closer to the ground with this additional information.
The table below shows the top five constituencies for the total number of bounce back loans taken out by companies physically located in the area.
It also shows the total amount they borrowed, the average amount borrowed by businesses located there, the projected default rates and who the sitting MP is.
This is who businesses might be contacting in future for help if their fortunes take a turn for the worse in the intervening weeks and months.
Once again, London based companies dominate these results
The City of London and Westminster constituency includes some of the most prominent and pricy real estate in the world including Pimlico, Hyde Park and most of Covent Garden.
Businesses here dominate both the number of bounce back loans taken out (16,122) and the highest aggregate amount borrowed under BBLS at well over half a billion pounds (£633,881,829).
Some of the other areas in the top five might be more surprising.
The neighbouring constituency to Westminster is Holborn and St Pancras, represented by Labour leader Sir Keir Starmer. This has the second-highest number of businesses taking out bounce back loans, borrowing a total of over £354 million, of which at least £53 million could be lost if just 15% of these borrowers default in the coming months.
Hackney South and Shoreditch, most commonly associated with technology startups and the hipster coffee hangouts, were the next most eager to borrow with over 9,000 bounce back loans obtained, which provided over £300 million in support collectively for the app builders and small artisan brewers in this quarter of the city.
The top five constituencies outside of London represent some of the other city centre areas of Birmingham, Manchester, Glasgow and Liverpool, along with a more surprising entry - Slough.
Most famous as a commuter town at the southern edge of the Thames Valley and the fictional headquarters of Wernham Hogg paper as seen in the titles of The Office, Slough is also one of the largest mixed commercial estates in Europe combining a number of large manufacturers and corporate headquarters which will attract other companies wanting to be located closer.
Chris Horner, Insolvency Director with Business Rescue Expert, said: “The data gives a fascinating insight into the distribution of bounce back loan borrowing across the whole of the country.
“It’s especially interesting when you look at which areas have seen the most businesses borrowing and the amounts they have loaned.
“Based on the insolvency cases of the small businesses we’ve worked with this year, over 41% of them entered liquidation with an outstanding bounce back loan balance of £37,350 - higher than the individual borrowing averages of any location.
“No matter where a business is based, the important thing for them to remember is that they do have options if they’ve taken out a bounce back loan and think they’ll have trouble repaying it.
“By getting professional insolvency advice quickly, possibly before any potential problems appear, they will be in the best position to react and respond.
“After nearly two years of consistent decline, company insolvency figures are starting to rise once more and as support measures are removed later in the year, we’d only expect this trend to gather pace.
“It won’t happen at a uniform rate across the country, it will affect some areas more quickly and deeply than others.
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.
The Treasury and Department for Business, Energy and Industrial Strategy have established a new business finance council that will specifically support small and medium-sized businesses.
It will be chaired by the Business Secretary, Andrea Leadsom and John Glen, economic secretary to the Treasury and will also include representatives from a number of major banks and lenders.
It’s not expected that ministers will seek formal guarantees from banks and institutions that they’ll lend specific sums in the event of a no-deal Brexit but that working capital facilities be maintained even in extreme circumstances.
The now-infamous Operation Yellowhammer planning would also provide emergency funds to companies that found themselves in financial distress as a result of difficulties caused by an abrupt no-deal departure.
The council would perform a similar function to Project Merlin, an industry-wide 2011 initiative when banks guaranteed to lend to hard-pressed businesses.
The British Business Bank has an Enterprise Finance Guarantee (EFG) of £300m in place. The EFG facilitates lending to viable smaller businesses that lack sufficient security against which to borrow. They provide existing lenders with a government-backed 75% guarantee against the outstanding facility balance.
The BBB also maintains an additional government supported fund called the Enable Guarantee. The facility supports additional lending capital.
Andrea Leadsom said: “Our financial system is strong and banks have the capacity to lend. I would urge lenders to take advantage of the support on offer from our fantastic British Business Bank.”
Small businesses could be forgiven for wanting extra assurances that there will be credit lines available.
Mike Cherry, chairman of the Federation of Small Businesses said: “While the council is undoubtedly needed, it requires direct input from firms on the ground to understand how best to support small and medium-sized businesses through a possible no-deal Brexit.
“If we do suffer from a downturn in the months ahead - as a number of forecasters predict - we need reassurances that the banks are not going to turn off the taps for small firms as they did during the financial crash.
“We emerged from the crash with thousands of small business banking horror stories. We can’t have those same mistakes repeated.”
While Brexit continues to create uncertainty in every sector it can cause otherwise well run and viable businesses into difficulties not of their making.
If you’re worried about what the short and medium term future holds for your company, get in touch with us today.
Our expert advisers will set up a free initial consultation to go over your current position and to help you identify any weaknesses and issues that can be shored up and strengthened before sooner or later, Brexit becomes a reality.