Bounce Back Loans: A Guide for Sole Traders

If you operate as a sole trader and cannot repay your Bounce Back Loan, it is understandably a very stressful experience. 

Sole traders do not have the same protection as limited companies, but you do still have some options to help you pay back the loan. 

What can a sole trader use a Bounce Back Loan for?

Just like limited companies, sole traders could only use the Bounce Back Loan (BBL) for purposes that would provide “economic benefit” to the business. 

Although this is quite a broad statement, it does mean that the loan must be used for business rather than personal purposes. The loan could be used for things such as payment for bills, business running costs, investments and wages.  

How do Bounce Back Loan repayments work for sole traders?

Again, just like with limited companies, no repayments are due for the first 12 months after borrowing. After this, you will pay the capital owed in monthly instalments with a fixed interest rate of 2.5% for six years. 

As a sole trader, you are still entitled to using the Pay As You Grow (PAYG) scheme which allows you to increase the repayment term to 10 years, delay repayments for 6 months and request interest-only repayments for 6 months.  

As with any loan, there are some possibilities that you might not be able to repay the full amount. If you’re struggling to repay your loan, you should speak with your lender, as they will likely have processes in place to support customers experiencing these difficulties. 

What happens if I don’t pay back my Bounce Back Loan as a sole trader?

Unfortunately, as a sole trader, if you cannot repay your Bounce Back Loan, you do not have the same legal protection of a limited company. Legally speaking, this is because there is no distinction between personal and business assets. You are therefore personally liable for the amount owed. 

While no recovery action can be taken against your personal belongings, such as your home or vehicle, you can still be pursued for the outstanding debts.

Will bounce back loans ever be written off for sole traders?

Despite the fact Bounce Back Loans were government backed, if you’re a sole trader and can’t repay it, the loan will not automatically be written off. 

The only way you can write off a sole trader’s BBL debt is to enter a formal insolvency process. 

Applying for an Individual Voluntary Agreement (IVA) will mean the BBL is treated as unsecured debt, which can be included in the arrangement. 

Once the sole trader has repaid the agreed amount, usually over the span of 5 years, the remaining amount of unpaid and unsecured debt is written off. 

A few benefits of entering an IVA include:

  • Once agreed, the IVA will freeze the debt and no more interest will be added
  • All creditor pressure and legal action ceases 
  • No upfront payments 
  • Your monthly IVA payments are set at a level that you can reasonably afford

Does a Bounce Back Loan affect your credit rating?

Since Bounce Back Loans are treated as unsecured debts, it shouldn’t affect your credit score as credit checks aren’t mandatory for the loan scheme. 

However, you may be affected by the loan in ways you may not expect. Although sole traders and self-employed applicants were assured BBLs wouldn’t affect their credit score, there appears to be an increase in mortgage lenders asking whether they took advantage of the scheme and how much they borrowed. 

Can I be held personally liable for my Bounce Back Loan as a sole trader?

Legally speaking, since there is no difference between personal and business assets for sole traders, you may be held personally liable for the amount owed. 

Sole traders do not benefit from what is known as the ‘corporate veil’ and so the debts end up belonging to the individual. 

Therefore, defaulting on the loan does render you personally liable. You will need to check the specific terms and conditions of your loan to see what policies your lender has in this situation. 

Can a sole trader be made to repay a Bounce Back Loan from their personal funds?

One of the main selling points of the Bounce Back Loan scheme was that business owners were not asked to provide personal guarantees. This is ideal for company directors who benefit from limited liability protection, however, it is not ideal for sole traders. 

While you can be held personally liable for a BBL, recovery action cannot be taken against your main residence or main personal vehicle, meaning that your house and car are safe. 

However, any other personal assets can be recovered to repay the debt and the lender could even apply to make you bankrupt. 

Advice for sole traders who can’t repay their Bounce Back Loan

If you’re a sole trader and you’re struggling to repay a Bounce Back Loan, don’t worry, as you’re not alone.