Frequently the issue of how a bounce back loan taken out following the Covid-19 Pandemic might affect the sale of a business. In this article we’ll look at the effect of a BBL on a business sale. 

What is the bounce back loan scheme?

The Bounce Back Loan Scheme (BBLS) was a loan with very favourable terms that was introduced by the UK government to give small businesses a quick source of affordable funds in the wake of the covid-19 coronavirus pandemic. 

Under the BBLS, small businesses could access loans equivalent to 25% of turnover up to a maximum of £50,000 to help mitigate the COVID storm and subsequent losses. 

No interest was charged for the first 12 months and the loan was 100% government-backed. That means there’s no need for assets to be provided as security or personal guarantees to be given by company directors.

Dissolving your business with a bounce back loan

Because a bounce back loan is an unsecured debt, from a legal perspective, it’s the same as any other debt. 

If the company has enough assets, like cash at the bank or stock that you can sell, you can clear the debt and close the limited company through Voluntary Liquidation. As the company director, you may also be able to make a claim for redundancy. 

If you can’t sell the business and end up considering a liquidation route, you need to be aware of the following which could bite you on the bum: 

• Did you personally guarantee other debts of the business i.e borrowings other than the bounce back loan. If the company is insolvent, the lender who has the benefit of the personal guarantee may seek to enforce.
• In the period leading up to insolvency, you acted in a way inconsistent with your legal duties, such as trading while insolvent, transactions at an undervalue or some form of financial misfeasance, it’s likely a personal claim could be made against you.  
• If you clearly used the bounce back loan monies for your own benefit rather than the company or misrepresented or fraudulently obtained the bounce back loan, again there will be a personal claim made. 

If you are worried about your finances and you have been trading for at least two years, then applying for directors’ redundancy payments could be a possible way to pay the fees.

However, if your company has no assets, you can dissolve the company, but you must inform creditors, all shareholders, employees, directors, and pension fund trustees of your financial position. You will need to report the letter to the Registrar of Companies, so that you can’t later be personally fined by the Registrar for any later failure to deliver accounts and annual returns.

You may receive a letter from Companies House called ‘Objection to Company Strike Off Notice’ if you try to strike off a company in debt. In most cases the objection usually lasts for six months and is then removed.

The Bounce Back Loan objections typically take longer because of the volume, and there are often delays to the strike off process where a bounce back loan is involved.

In the event of a bounce back loan, the lenders to whom the Bounce Back Loan is owed are the triggers of objections. Even though these loans have been guaranteed by the HMRC, the banks are the ones responsible for chasing defaulted loans.

If the Bounce Back Loan has been used in the way it was intended, to support the company, then there will likely be no issues.

Selling a business with a bounce back loan

If you’re selling your business by way of a share sale, then technically the bounce back loan will remain in situ and the new owners will take on liability for repayment of it.

However, in my experience, almost all purchases will be on a cash free debt free basis – meaning the buyer will often require you to repay the BBLS before completion of the business sale – that could be from company funds or occasionally from your sale proceeds.

If the sale is an asset sale, then the bounce back loan will not automatically transfer and so your business (or limited company) will be left with the need to repay the loan or consider the options above.

If you need advice about any issues relating to selling your business, your bounce back loan, or both, please get in touch today. I can help.