The new coronavirus Bounce Back Loans scheme was announced in April as a result of the financial pressures the coronavirus pandemic has caused to many small businesses in the UK. The 100% government backed scheme is available for the smallest businesses affected and has been designed to provide loans of up to £50,000 to help keep such businesses operating during these challenging times. 
.While the idea of such a loan is very appealing with so much uncertainty in the air at the moment, it's important that you fully understand and evaluate the pros and cons of applying for such a loan and of course the rules surrounding the withdrawal of one. 

So how does a Bounce Back Loan work? 

According to the dedicated Bounce Back Loan (BBL) section of the HSBC business bank account website, the scheme "can be used for any economic benefit to your business, enabling it to continue as a going concern, which may involve the refinancing of an existing facility used for an Eligible Purpose and to support trading or commercial activity in the United Kingdom." 
 
So what does this actually mean? Essentially, a BBL can be used to help keep your business ticking over in the coming months. They are not to be used to assist you in your personal finances - or you'll end up with a hefty director's loan to repay! 
 
You can use a BBL to pay staff wages including your own director's salary (but not dividends, unless you are in profit). You can also use a BBL to pay your rent or business rates, to pay monthly business finance costs, to refinance other business debts to reduce interest costs or to pay ongoing overheads such as telephone bills, subscription costs and so on. 
 
You cannot use a BBL to pay the money into a personal savings account to accrue interest (you can use a business savings account for this though). You're also unable to use it to support your family and friends or to pay for a holiday to help you recover from all the madness after this all blows over! 

Why shouldn't you just withdraw your balance from the company bank account? 

Our limited company director clients are often asking us whether they are permitted to withdraw the whole amount shown in their company bank account. It's important to note that your profit available figure will often be different from the actual balance in your company's bank account, and there may be a few reasons for this... 
 
Reason 1: Taxes 
 
You should always refer to what profit is available to withdraw as a dividend, rather than what money is actually in the company account. The most common reason for this is that there are taxes due. You should always bear in mind which taxes you have due (including corporation tax, VAT and PAYE) when you are considering the amount available to draw as a dividend. 
 
You should aim to save 19% on every invoice raised throughout the year to pay your corporation tax - so for every £1,000 you raise in invoices, ensure you're putting aside £190. This doesn't take into account any deductible expenses for the purpose of this blog but you can read more about that here.  
VAT is paid on a quarterly basis, and as such you should be saving 20% from each VAT-able invoice paid for this reason. PAYE is also paid on a quarterly basis, but only if you have employees and you are paying tax and/or NI attracting salaries. You should be holding that PAYE back from their salary to pay each quarter, so your company's bank balance will be showing a higher balance than what is actually available for you to withdraw. 
 
Reason 2: Timing 
 
Current legislation says that accounts should be prepared on an accrual basis as opposed to a cash basis. This means that both expenses and income should be matched to the accounting year that they relate to, rather than reporting revenue on the income statement once cash is received. This also means that when a company's accounts are prepared, some adjustments may have to be made to move certain expenses or invoices into a different year. This can then affect the profits available; an expense or invoice that has been paid will obviously change the bank balance itself, but may not change the available profits figure until the following year in which it will be accounted for. 
 
Reason 3: Debtors and Creditors 
 
If you have any unpaid invoices i.e. debtors, this affects the available profits in the company's bank account and may make them appear higher than the company bank balance. If you owe any money to suppliers, for example a bill, then the cost of that purchase will lower the available profits, but this will not show up on the company's bank balance until the supplier has actually been paid and money has left the account. 

Next steps 

If you are unsure about whether or not to apply for a BBL, book a call with us or send us an email. We'll also help to ensure you are using or investing this money wisely. And remember - it is a loan. You will need to repay it! 
 
 
 
 
Written by 
 
Nicola J Sorrell - 
Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
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