Bounce Back Loan: Understanding personal liability and alternative funding options

Directors are not personally liable for Bounce Back Loans taken out by their company. Instead, the government provided security to the banks in the event of non-repayment of a Bounce Back Loan. The exception to this rule, however, is if you have misused Bounce Back Loan funds; if this is the case, you may be held personally liable for the balance of the loan.

As the Covid-19 pandemic threatens to hinder businesses across the country, the government has announced an unprecedented support package to help companies and their shareholders survive these challenging times.

Following widespread criticism of the Coronavirus Business Interruption Loan Scheme (CBILS) which saw a small fraction of applicants successfully secure funding, the government subsequently introduced the Bounce Back Loan Scheme (BBLS) as an alternative.

What are Bounce Back Loans?

As the name suggests, Bounce Back Loans are designed to help Britain’s SMEs weather the current government-imposed restrictions on business, and give them the resources to ‘bounce back’ quickly once trade is permitted to resume.

Aimed at small businesses, the BBLS give companies access to loans worth up to 25% of its turnover, up to a maximum of ?50,000. They are provided interest-free for the first 12 months, with a competitive rate of 2.5% levied afterwards and fixed for up to six years. The government provides security for 100% of the loan amount, lowering the risk to lenders.

Chancellor Rishi Sunak, promised the application process would be swift, with companies able to receive funds within 24 hours of applying. However, so far, the loans have failed to live up to these lofty expectations.

Struggling to access a Bounce Back Loan?

In spite of the government’s assurances of a much smoother application process than that experienced by CBILS applicants, unfortunately the reality has seen many company directors struggle to get a Bounce Back Loan, finding themselves once more locked out of the help on offer.

While over ?2bn worth of Bounce Back Loans were secured within the first 24 hours, this represents just 53% of the 130,000 initial applicants.

One of the challenges is that only a small number of banks have been authorised to issue Bounce Back Loans, and those that have are choosing to prioritise their own business customers. This is leaving tens of thousands of small businesses unable to apply for a Bounce Back Loan even if they otherwise meet the lending criteria.

Bounce Back Loans and Personal Guarantees: Understanding your liability

The government is providing 100% security to the banks for loans taken out under the BBLS, however, it is the responsibility of the business to pay back the loan once monthly repayments begin following the initial 12-month grace period.

As the government is providing the banks security for the full loan amount, this means that company directors will not need to provide a personal guarantee to underwrite the borrowing.

Not having to provide a personal guarantee becomes extremely valuable if the company is unable to recover from the impact of Covid-19, finds itself in financial distress at a later date, or goes bust. If the company becomes insolvent and subsequently enters a formal insolvency procedure, such as Creditors’ Voluntary Liquidation, then responsibility for repaying the Bounce Back Loan my company will remain solely with the company and liability cannot and will not be transferred to directors or other shareholders provided they comply with their statutory and fiduciary duties as a director. This means there is no risk to a director’s personal assets or individual credit rating should their company not be in a position to repay the loan.