At this moment, the UK is facing a great economic challenge, more than any other country. The country was shaken by at least four major events, which took place one after the other. If in the first instance we were hit by the impact of Brexit, then the pandemic followed, then the war in Ukraine and recently the death of our beloved Queen Elizabeth II. All these events left their mark on and gradually aggravated the economy of Great Britain.
Milk and honey with side effects
The events we mentioned above created repercussions in the behaviour of businesses at present. Like a snowball, the effects created by one event compounded throughout the others that followed.
At this moment, one of the major topics that most businesses face in the UK when it comes to the national economy is Business Bounce Back Loan.
From an economic point of view, during the two years of the pandemic, Great Britain has been one of the countries with the most sustainable programs to help businesses through a multitude of financial schemes. And this meant a lot of money. Some £500 billion was printed by the Bank of England during the pandemic, without the economy producing at its maximum capacity. Therefore, this was not a long-term solution, but a bubble was created which at this moment is exploding.
We are now beginning to understand that we are affected by side effects, as a result of the governmental decisions made in 2020/21.
From inflation to economic crises
We wrote about the causes of inflation in a previous article. Things continue to evolve and the crisis to deepen. Thus, in August 2022, the situation of the external debt of the UK because of the loans is not at all exciting.
The UK’s gross public debt was £2,365.4 bn at the end of the first quarter of 2022, equivalent to 99.6% of gross domestic product. The UK government deficit (or net borrowing) was £15.8 bn in Q1 2022, equivalent to 2.6% of gross domestic product. See below the chart showing the inflation rate.
Business Bounce Back Loan
During the pandemic, one of the government programs assumed that banks could offer bank loans guaranteed by the state to companies that were affected in business by the pandemic. However, because things were done somewhat hastily, the necessary eligibility checks were not done at that time.
The loans were meant to help small businesses gain access to quick, “emergency” financing. Companies were able to borrow between £2,000 and £50,000. And the loans could be used for:
- Payment of staff salaries
- Payment of rents and other business rates,
- Monthly business costs or general expenses (telephone and electricity bills),
- Refinancing other business debts to reduce interest costs.
The loans were interest-free for the first 12 months. It had a 100% Government-backed guarantee for lenders and once the eighteen months were up, there was an interest rate of 2.5% per year. Repayments can be stretched for up to 10 years.
Because the eligibility checks were not done properly, the situation has produced a disastrous side effect on the UK economy today. An enormously large percentage of companies entered insolvency starting in 2021. And this number is continuously increasing. Therefore, in the medium and long term, bank loans were not very useful to small companies that do not know how to manage their finances. On the contrary, the BBL pushed these companies towards certain insolvency.
What happens if you can’t pay Business Bounce Back Loan (BBL)?
First of all, you must know that the chancellor has extended the flexibility of the loan. From now on, it will be available to everyone from the first repayment, rather than after six repayments have been made.
Businesses can therefore choose not to make payments on their loans for up to 18 months after they originally took them out.
If you still cannot pay the Business Bounce Back Loan, the directors of the company must act in the interest of the creditors. Otherwise, they risk personal liability.
That is why it is advisable not to spend the bounce-back loan money until there is nothing left to pay your creditors, wages or liquidation cost.
If you are wondering if you can simply dissolve the company in this case, please find out that you cannot! It is precisely for this reason that the Insolvency Service is to be given powers to investigate directors of companies that have been dissolved. Of course, this will discourage the abusive use of the company dissolution process.
The only way out of this problem is to go through the insolvency process. In this case, the bank will receive the money back from the government, but only if the company is liquidated.
Note that the BBL was a loan to the company, not to you as an individual, even if you are a director and sole shareholder. Consequently, if the company goes into liquidation or administration, the loan will be cancelled and the company will cease to exist.
It is difficult to anticipate force majeure events that can affect an entire national, continental or even global economy. Especially since your professional training is not a financial one, no matter how resourceful you are in your business. In the future, secure your business by working with a financial and accounting advisor who can protect you from many problems that, most of the time, seem like dream solutions in a time of crisis.