Analysis highlights the scale of the issues

New research of bounce back loans have revealed that nearly £1 in every £6 paid out as part of the key pandemic finance scheme was potentially fraudulent. 

This equates to £640 million which the government is confident enough to label as suspected fraud. Additionally, another £4.1 billion of the amount paid out (£46.6 billion or 8.8%) has been defaulted on.

Out of all the accredited lenders in the scheme, Starling Bank has identified the highest proportion of loans, some 5.9% as being suspected fraudulent with £695 million of their £1.6 billion bounce back loan lending book (34%) as “not performing” or at risk of default as chief executive Anne Boden told the Public Accounts Committee in December 2022. 

Metro Bank, another “challenger bank” has a high proportion of non-performing bounce back loans. Out of the total £1.2 billion lent out, £529 million are in arrears or default compared to the £717 million that are on schedule or have been repaid. Their rate of suspected fraud is significantly lower at 0.5%.

A spokesperson said: “Proportionately, Metro Bank arrears and default rate represent 6% of the total arrears and default rate across all lenders, and we expect that number to further align with our contribution to the scheme as the portfolio matures.”

The British Business Bank, which oversaw the bounce back loan scheme and Starling have both said in the past that it was difficult to make precise comparisons between lenders because banks vary in their approach to monitoring credit performance. 

The report which went to the end of December 2022 looked at the bounce back loan lending scheme (BBLS) as well as the coronavirus business interruption loan scheme (CBILs) which paid out £25.9 billion to medium sized companies. It also covers an additional £4.5 billion which was exclusively lent out to larger companies. 

The bounce back loan scheme allowed businesses to borrow up to 25% of their annual turnover up to a maximum of £50,000 with loans fully underwritten by the government in the event of a default.   

This guarantee was seen as essential in order to get lenders to suspend their normal credit checks to get the money out to borrowers far quicker than under normal circumstances. 

Initial lending under the CBILs scheme which was held up due to credit checks which led to BBLS being designed differently although this also made it more vulnerable to fraud and other criminal abuses. 

Sadly, as we’ve written on numerous occasions, bounce back loan fraud has been so endemic and pervasive that Lord Agnew, a government minister, resigned in protest at the slow progress because of the Insolvency Service and HMRC in recovering funds and taking action against directors. 

While they have taken him at his word and increased their enforcement action in the previous year, the ongoing moribund economic conditions have also meant the more honest directors and businesses have been having trouble keeping up with repayments which has seen more fall behind and default on their loans.

Chris Horner, insolvency director with BusinessRescueExpert, said: “When the bounce back loan scheme was rolled out it was effective at getting money to some companies who needed it there and then. 

“Unfortunately, as with most large schemes, it was always going to attract dishonest and disreputable actors. 

“Nobody would have predicted that when they designed the scheme that the economic landscape would have been as tough as it has been over the past couple of years after the pandemic, otherwise they might have been allowed to borrow more and/or pay it back over a longer period. 

“When you factor in high inflation, rising interest rates, falling customer confidence and general rising costs for most businesses then you can see why bounce back loan repayments are being squeezed so tightly. 

“With HMRC and the Insolvency Service being more proactive in recovering outstanding arrears, it is imperative that directors and business owners get impartial insolvency advice before making any fundamental decisions this year.

“There are several perfectly appropriate and legal ways to restructure or close a business with outstanding bounce back loans or other debts but they have to be considered carefully.”

Bounce back loans are becoming a cautionary tale for directors who think they are doing the right thing for them and their business in uniquely tough circumstances. 

What seemed like a no-brainer decision of money to tide over a business that might have had to stop trading for months through no fault of their own, could now have turned into an expensive weight holding them back. 

Even if they are able to make repayments on the loan, it will still be costing them money that could be better used elsewhere within the business. 

This is precisely why we offer a free initial consultation for any director to better explore their financial situation and options. 

After speaking with one of our advisors, they will have a clear understanding of what they can do to either strengthen their business further or to look at other options including closing their business down through a liquidation process that would also see their debts – including bounce back loans – written off as part of it. 

But before any of these discussions can take place, they have to make the most important decision of all first – and that’s to get in touch.