The numbers of defaulting loans and level of fraud are huge!
There is no denying that the introduction of COVID19 financial support schemes such as Furlough and Bounce Back loans helped hundreds and thousands of small businesses to stay afloat over a prolonged period of total closure and then reduced activity levels.
However the ease of access to the schemes (especially BBLS) allowed fraudsters to exploit the process and steal government backed money. In addition a large number of businesses now have extra debt than before the pandemic and even though the repayment terms have been tweaked a number have defaulted on repayment and some have entered insolvency procedures to avoid repayment. The defaults are skewing the insolvency numbers.
Analysis of the level of fraud and default are still at an early stage but the figures involved are very large indeed.
The National Audit Office undertook research in late 2021 to look at the likely levels of fraud and default. A summary of their findings are shown in the following graph produced by ICAEW.
This chart shows the value of bounce back loans that are likely to default or be subject to fraud. Putting numbers of businesses into the equation there were 1,539,788 BBLS loans made. Using the values above (which I accept is not an exact science due to differing amounts borrowed up to a maximum of £50,000 per business) then somewhere in the region of 393,000 business are expected to default and a further 163,000 businesses made fraudulent claims. Of course the government would counter that they are investing more resources to tracking down fraudsters and the banks involved in the scheme would hope to do better on the defaulting loans as they work their way through their portfolios. The government set up the Taxpayers Protection Taskforce bur recently announced that the taskforce would be disbanded in March 2023.
In terms of insolvencies this year England and Wales are on track to have approximately 21,000 corporate insolvency cases. The most corporate insolvencies in a single year was 1992 when 33,203 companies entered an insolvency process. You can see that we are a long way from clearing through the default companies if we only process insolvency for, say, 30,000 companies a year.
I did my own research project in March and April 2022. I took a sample of 100 cases a month that proceeded into liquidation in each of those months. Of those companies 73% had been in the BBLS scheme. The Insolvency Service chart of corporate insolvencies shows the number of insolvencies going back to 2019 to show the effect of the pandemic and the chart is reproduced below.
You can see that other forms of corporate insolvencies (such as Administrations and Company Voluntary Arrangements) have flatlined and Compulsory Liquidations are just starting to increase back to pre-pandemic levels. The big increase in in Creditors’ Voluntary Liquidations – initiated by the Directors or shareholders and in the majority of those cases there is a bounce back loan liability.
These figures are backed up by information released on behalf of The British Business Bank which oversees the BBLS. Their evidence suggests that 318,456 of the loans have been extended to 10 years AND have taken advantage of a 6 month repayment holiday. That is 21% of all loans. This figure ties in with the National Audit Office’s suggestion that 25% of loans would default.
The level of default and fraud should concern everyone. Was the process by which businesses obtained funds too light touch? It certainly appears to have been so.
Is the process of collection too light touch? Not sure on this point yet. The majority of businesses that cannot pay are taking advantage of payment holidays – once those payment holidays have finished the defaults may increase.
If we have a pandemic again will we do things differently? Absolutely – although Government had to balance getting money to people quickly against the risk of default and fraud the processes set up were too easily exploited. This is taxpayers’ money and losing billions in fraud and defaults is unacceptable. There was always going to be a certain level of default and fraud but the percentages are too high from this particular scheme.
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