Bounce back loans

Bouncing back from the brink

Richard Simms asks whether the strict range of terms and conditions mean that bounce back loans amount to a bouncing bomb.

Richard Simms

Managing director, FA Simms & Partners M any small and medium-sized businesses have received a bounce back loan. Around 860,000 loans were approved in the first six weeks and these loans are essential for businesses affected by the Coronavirus pandemic.

However, HM Treasury has warned that any misuse of the scheme could result in prosecution for fraud. It is important that a problem isn’t inadvertently created by not understanding the scope of the loan and what can and can’t be done with this money.

Bounce back loan terms and conditions

The bounce back loan is a debt, not a grant, and consequently has terms and conditions attached from the lender, which should be checked very carefully.

Common conditions include: ● There is only one application per “group”. If you have applied for more than one business that is under common ownership or control, then this is fraud. ● You must not have already received a loan under the Coronavirus Business Interruption

Loan Scheme (CBILS), the Coronavirus Large

Business Interruption Loan Scheme (CLBILS) or the Covid-19 Corporate Financing Facility (CCFF) unless you are refinancing it in full with the bounce back loan. You have until 4 November 2020 to arrange this with your lender. The bounce back loan is an alternative source of finance if you have been affected by the Coronavirus outbreak. It can be used for a wide range of purposes, such as working capital or investment, but it must support trading or commercial activity in the UK. It is not for personal use. If the business that takes out the loan is in default under the terms of any other borrowing facility, whether it is with the same lender or not, it will be deemed to be in default of the bounce back loan. Be particularly careful if your business needs any other source of funding during the life of the bounce back loan taking any form of security, mortgage, charge, pledge, lien or encumbrance over its assets whatsoever. You must check this is allowed in the loan terms and conditions, as often it is not.

Bounce back loans and fraud

As a spokesman for HM Treasury stated: “Our bounce back loan schemes are designed to keep businesses running during this difficult time… We’ve been clear that the loans must be repaid and banks are undertaking appropriate precautions against fraud,

including customer checks and the monitoring of transactions. Any fraudulent applications can be criminally prosecuted.”

How is fraud being committed? There has been speculation that bounce back loans are being used to fund luxuries such as “supercars”. Car Dealer Magazine has spoken to several top end car dealers who all confirmed that this is a definite trend.

The lines between what is and what isn’t company money can easily be blurred. Liquidators regularly deal with directors of insolvent limited companies who routinely use the company bank account as an extension of their personal bank account. Sometimes, the first time that a director becomes truly aware of the implications of this is when a liquidator asks for the many thousands of pounds of those transactions to be repaid.

Anecdotally, it seems that some people believe that this particular loan is “free money” and that should businesses flounder the debt will go with them. This is not true and is a dangerous way to view the situation.

Money laundering Do not forget that the lender and the accountant has a legal duty, as part of its money laundering obligations, to report to The National Crime Agency if they have a suspicion that a business has obtained or is using a bounce back loan fraudulently. If it is proven, this could result in criminal prosecution.

Is your company solvent?

The bounce back loan was introduced to quickly and efficiently provide funding to a business in difficulty due to Covid-19. However, it should not be viewed as an opportunity to pay back loans from the business owner to the business or to borrow money from the company.

Why? Because if the business has trading difficulties, becomes insolvent and is not able to recover from that position, then it could be placed in a formal insolvency process and the appointed insolvency practitioner will need to identify the point in time when the company was last solvent. They must then review the activities of the business and establish the reasons for the failure of the business.

That review process will also consider whether the bounce back loan was obtained when the company was technically insolvent (with or without the owner’s knowledge) or whether the company become insolvent from actions taken after the loan was obtained.

How to find out if your company isinsolvent ● Balance sheet insolvency: A company is insolvent if it does not have sufficient assets to discharge its debts and liabilities. Author bio Richard Simms is managing director of FA Simms & Partners. He is an FCA Qualified Accountant, has a Diploma in Anti Money Laundering and is a licensed insolvency practitioner. In simple terms: is the total of what you owe more than you own? The easiest way of identifying this is if a company has positive reserves on its balance sheet Cash-flow insolvency: This is when a company cannot make a payment when it is due. This will often be highlighted by a demand for payment by a supplier or lender which the business is unable to meet.

The key principal of insolvency law is that those owed money by the business must be treated fairly. For example, if ten people are owed £1,000 and the company has £1,000, then they should each get £100.

In some circumstances, those owed money (the creditors) have a legal priority over other creditors.

Associated creditors Any payments by the business that do not follow the correct legal priority may well be reversed if the business ends up in a formal insolvency process; for example, a repayment of a loan to a business owner in priority to others. It is also worth noting that if a bounce back loan is used for personal use, it would be legally repayable and personal assets may be at risk.

Can a bounce back loan be used to pay a dividend or salary?

Dividends Money Saving expert Martin Lewis asked the Treasury whether a bounce back loan can be paid as a dividend if a business has retained profits but is cash poor. The answer to the question was “yes”. However, a broader answer might include a discussion on taking dividends from a company when the company might be deemed to be insolvent. A dividend paid from an insolvent company may also need to be paid back if the company enters a formal insolvency process, so if by making the dividend payment the company has become insolvent then it would again be repayable.

Salary Any salary taken via a PAYE scheme should be set at a reasonable level. An excessive salary would also be investigated by an insolvency practitioner during a formal insolvency process and it is important to remember that these loans must be used for the economic benefit of the company and not the individual.

If you are unsure of the future of a business or the use of a bounce back loan, please visit www.BusinessSupport.co.uk. The site brings together best practice advice, checklists, case studies and how-to guides addressing many aspects of business financing, planning and management within the context of the Covid-19 crisis. ●