Analysts have warned that some business owners may have taken out Bounce Back Loans when technically insolvent.
Richard Simms, the managing director at FA Simms & Partners, which has an office in Leeds, said, the loans, which were announced by Chancellor Rishi Sunak, provide essential support for businesses affected by the coronavirus pandemic.
Mr Simms added: “There are some hidden pitfalls and HM Treasury have clearly warned that any misuse of the scheme could result in prosecution for fraud.
“Beyond the attention-grabbing headlines of those tempted to splash it all on fast cars, there are others who are about to unwittingly store up trouble for themselves further down the line by doing what they think is the right thing.
“Many may well be tempted to use the loan to pay down company debt to get landlords and creditors off their back for a while,’’ said Mr Simms.
“This sounds reasonable but what they may not realise is that, if their company is already in an insolvent position - many are without knowing it - there are strict rules about the order in which creditors are paid.
“If paid in the wrong order, directors may well open themselves up to investigation, they may be prevented from striking their company off at a later date and they may be left with no option other than taking an insolvency route out of their troubles. They could even end up with personal liabilities.”
Mr Simms said his company is seeing a spike in enquiries from business owners who have spent their loans and are wondering what to do next.
He added: “In a growing number of these cases, we are having to track back to the company’s last point of solvency – the date an insolvency investigation will go back to - to unpick the mistakes that have been made since.
"Rectifying the issues typically involves finding additional cash to ensure creditors are paid in the appropriate order. It’s often not an easy process."
The best way to use a Bounce Back loan is to spend it on business recovery, Mr Simms added.
He added: “This means investing in getting your business trading again. Don’t use it solely to pay off debt.”
"Instead, negotiate with creditors and landlords to get them off your back. In many cases they will be supportive and provide the breathing space for a business to find
its feet again.
"And even if they are not supportive, there are still options. Using a loan to pay the most demanding creditors off is often the wrong solution. It’s crucial to keep money back to restart a
business when the time comes. If in doubt, seek professional advice."
The Bounce Back Loans Scheme is designed to keep businesses running during the pandemic and has so far helped more than 920,000 small firms, the Treasury spokesman said.
The spokesman added: “We’ve been clear that the loans must be repaid and banks are undertaking appropriate precautions, including customer checks, requiring companies to state if they are subject to insolvency and the monitoring of transactions.
"The Government expects everyone to act responsibly and in the spirit of the package, and only claim and use support as intended.”
A Treasury spokesman said the Bounce Back Loans should be used for the economic benefit of the business, which may include wages.
The application form requires firms to declare that they were not insolvent at the end of 2019.
Applicants must declare that they were carrying on their business on March, 1 and that at the time of application they were not subject to any kind of debt relief order, company voluntary agreement or be in liquidation with creditors, the spokesman said.
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