The bounce back loan scheme was designed to distribute money quickly to businesses that were in desperate need of funds when it was launched in March 2020.
£47 billion of funding was loaned out to over 1.5 million companies. Over 90% of these or £39.7 billion was awarded to small and medium sized businesses with a turnover of £632,000 or below.
To give a sense of scale, one in four UK businesses applied for one of them and as the NAO noted: “The government prioritised payment speed over almost all other aspects of value for money.
The government says that it expects up to 37% or £17 billion of loans would not be repaid either through fraud or because legitimate borrowers would not be able to afford the repayments when they came due.
This is slightly better than the median case scenario outlined in scenarios from HM Treasury in March 2021 that we highlighted in our bounce back loan investigative series published earlier this year.
Under that case the total number of bounce back loan defaults to rise to over 600,000 while £18.6 billion would remain unpaid.
To give an example of the scale of this figure, it is the cost of building 16 Wembley Stadiums!
Additionally, the NAO thinks it has identified approx. 11% or £4.9 billion of funds that have been paid out fraudulently
According to internal estimates the level of fraud is from £3.5 to £4.9 billion but this excludes general dishonesty such as overstating turnover in order to secure a larger initial amount. This refers to newly formed companies or existing businesses used purely to access bounce back loan lending.
At the end of September the British Business Bank found that £2 billion of loans had been repaid set against a further £1.3 billion had been defaulted on.
The NAO found that about 7% or 100,000 of loans were at least one month in arrears and that despite 13 anti-fraud measures being introduced after the scheme’s launch these were “too late to prevent fraud and were instead focused on detection.”
So far only £3 million has been recovered through 33 investigations with a total of 43 arrests.
One factor that hasn’t been discussed in detail is the lending banks forbearance and potential reticence in pursuing outstanding or overdue bounce back loans.
The amounts paid out do have the backstop of being guaranteed by the government but this arrangement has conditions attached including providing evidence that they have made genuine attempts to reclaim outstanding bounce back loan funds.
Although the NAO recognises that different lenders might treat their borrowers differently. There are specific recovery principles set out under the scheme although there is leeway for lenders to follow their “business as usual” approach to debt recovery providing it doesn’t contravene the principles of the scheme.
This means that if a lender's usual approach includes using debt collection agencies then this would be allowed but doorstep visits from bailiffs would not be allowed under the scheme.
When the scheme was first launched there was a lot of discussion around lenders on how the recovery process would operate, foreseeing that it could be problematic in PR terms trying to recover funds from struggling businesses who got into trouble through no fault of their own.
The sheer volume of loans to be administered and recovered led to them exploring setting up a separate body to oversee the process of subcontracting the whole endeavour to UK Finance - the banking trade body - but this was ultimately rejected.
The report also focused on how potential fraud would be handled.
BEIS - The department of Business, Energy and Industrial Strategy - reiterated that their main priority would be pursuing organised crime which was viewed as the highest risk group along with sums of more than £100,000 borrowed.
They note that while some individuals might have acted dishonestly to obtain a loan or dishonestly received one, they would not be a focus for their investigative teams if there are no other fraud indicators present.
The preference is for lenders to pursue unpaid amounts and recovery where feasible.
The Financial Conduct Authority (FCA) wrote to all lenders as their main regulator in July 2021 to remind them of their wider obligations to report fraud but the NAO recognises that as long as borrowers make repayments and the lenders make genuine attempts to recover outstanding debt then there is little they could do further to this.
Chris Horner, insolvency director with Business Rescue Expert said: “The evidence the NAO has seen matches what we’ve been hearing from businesses that have tried to close with an outstanding bounce back loan but have been stopped by HMRC.
“They are treating this as a high priority now so dissolution or striking off is now virtually impossible for a company with these debts outstanding.
“As lenders are being pressured by the government from above to recover more arrears, they will step up their pursuit of companies.
“Combined with HMRC using more compensation orders to make directors and business owners personally liable to repay any outstanding debts of a struck off business, this could be a worrying time - even without the Omicron variant and more potential restrictions on businesses trading in one of the busiest periods of the year.
“We know everybody is busy but taking an hour to get some professional insolvency advice might be the best use of 60 minutes this entire year.
“What they will learn and decide to do with their business might be the difference between being able to look forward to 2022 with some hope and enthusiasm against not being able to visualise any way past current financial difficulties.
“For instance, if a business chooses to close down through liquidation then even if they have outstanding bounce back loan arrears, it will be treated as any other type of unsecured debt.
“Which means if the directors have done their best to keep the company going then it will be allowed to close. The lender would be repaid by the government and the directors can cleanly move onto the next phase of their careers.”
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