Bounce back loans, what you really need to know

Understanding bounce back loans

Bounce back loans were introduced by the government to support small businesses struggling with the impacts of coronavirus. The loans launched in fears of small businesses not being able to access coronavirus funding quickly enough.

Bounce back loans offer a 12 month interest free period on amounts ranging from £2,000 up to £50,000. With the aim of getting funds out to small businesses as quickly as possible.

With little eligibility needed and a 12 month interest free period, the bounce back loan can be seen as an appealing offer. But it’s important to know a few key details when utilising the funds. If funds are used incorrectly you could be held liable.

There is currently a plethora of information and advice on bounce back loans. In this article we will cut through the jargon and explain what bounce back loans are, how they work and what to know when using them.

What are bounce back loans?

Bounce bank loans are facilitated through approximately 14 UK banks and are backed 100% by government funding. The loans were initially set up for small businesses who are struggling to access CBILS funding.

Unlike a mortgage where the property becomes a secured asset, the bounce back loans are unsecured. This is because the loans are backed by government funding, making them quicker to distribute.

Some key points on the loans;

  • You can borrow between £2,000 and £50,000, however this is capped at 25% of your annual turnover. Your 2019 turnover will typically be used as a guide, if you’re a new business, estimates will be used.
  • No interest will be charged, and they require no repayments within the first 12 months. After the 12 months, interest is fixed annually at 2.5% making the bounce back loans very low cost and appealing.
  • The loans are set up for a 6 year period with no charge or penalties for early repayment.
  • Businesses must have been established before 1st March 2020 to apply.
  • Both your business and personal credit ratings shouldn’t impact your eligibility, making the loans easier & quicker to apply for.
  • Some banks may run soft searches on your credit ratings, with the loan most likely appearing on your business credit report.
  • Bounce back loans do not impact your ability to access further government funding, such as universal credit.
  • Bounce back loans can be used to pay off existing finance.

How they work

Most accredited lenders, especially banks, are only accepting existing customers and a typical application requires details of your annual turnover, account number, the amount you wish to borrow, a copy of your recent tax return and confirmation that your business has been impacted by Covid.

Once an application has been made to an accredited bounce back lender the process should be completed within 48 hours. With funds being paid out on the same day of approval – although this can vary depending on the lender. The best place to start is with your current bank.

Once set up, no interest is charged nor is payment required for the first 12 months. After this 12 month period an annual interest will be calculated based on the outstanding principal.

After the first 12 months, interest will be calculated on the outstanding principal month to month. Meaning, whatever is left of the original amount borrowed (the principal) will be used to work out how much interest needs to be paid. This means your monthly payment overtime will decrease and change as the amount of outstanding principal reduces. Very much like a business overdraft.

If you are able to pay off the loan early, then the amount of interest will be calculated based on the outstanding principal and days of use. Which would result in a slight saving. Put simply, the longer you have the loan the more interest you pay.

Using a bounce back loans to support your income

There is a lot of advice floating about on how to utilise a bounce back loan. Currently there are no strict rules on using the bounce back loan to support your income. The bounce back loans are there to cover business costs.

If you are a limited company director the money you receive is not yours. It’s for the business. However, there are three ways of receiving funds from the business to supplement your income.

These are;

  • Dividends – whilst these need to be paid from profits, the bounce back loan can be used to pay off existing debts to free up the money needed.
  • Taking a salary – paying yourself a salary can count as a use of working capital. Which means the loan can be used to supplement your salary.
  • A loan to the director – If cash is available in the business, maybe as a result of the loan freeing some of this up, then a director can temporarily borrow money from the business.

It’s important to know;

  • If a dividend payment is made and is found to be unlawful (read our guide here) then the company’s director is liable. This is the case even if the business becomes insolvent. Administrators can chase up a company’s director for payment on unlawful dividends. HMRC can also impose tax penalties if a dividend is unlawful and seen as a salary.
  • Under the loan to a director -if money lent to the director by a business is not paid back within 9 months, then a whooping corporation tax of 32.5% becomes payable.

If you are a sole trader and use a bounce back loan by taking cash from the business, it’s important to note you are liable to repay the loan.

Working with your accountant

There are lots of schemes and support out there for small businesses. From the coronavirus business interruption loan scheme, to alternative lending and of course, bounce back loans.

Right now, the biggest challenge to businesses is running them. Adapting to regulations and ensuring the day to day operations are working. It can be hard to focus on getting money into the business from one of the multiple support schemes, let alone understanding the longer-term impacts.

As a company director, a quick injection of money now from a bounce back loan, done incorrectly could leave you with either a 32.5% tax bill or personally liable should your business become insolvent.

Understanding your businesses realtime cashflow and projected earnings are more important than ever. Bringing your accounts up to date and placing procedures to keep them updated is vital. Not only will this allow your business to make applications with ease, move quicker, but you’ll be able to weigh up all of your options available. Meaning you are able to look at the longer term impacts of taking finance.

By just understanding your cashflow position and building a plan, might be all it takes to navigate this turbulent time. A good quality accountant will not only be best positioned to support you, but they’ll act as your rock for times to come.

In summary…  

In summary a bounce back loan allows your business to borrow up to 25% of your annual turnover, with the first 12 months interest free, requiring no repayments.

Whilst it might seem like a great idea to inject cash into your business, to support income, there is the potential to open up personal risk.

Speaking with your accountant and bringing your data up will be the best place to start. Here at Bidwell, we are continuing to release information and support small businesses. With our expert knowledge and capable tools, it’s our duty to not only support small businesses right now, but to future proof them for the better.

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