COVID loans: the aftermath

Of the various measures implemented by the government to support businesses through the pandemic, the COVID loans now look, to some observers, like a costly mistake.

In particular, the Bounce Back Loan Scheme (BBLS) may have an impact on the public purse which is felt for years to come. Announced by the Treasury on 4 May 2020, the BBLS allowed ailing SMEs to borrow between £2,000 and £50,000 from accredited lenders, with the government covering all interest payments and fees for the first 12 months, with a flat interest rate of 2.5% thereafter and the term loans to be repaid over 6 years.

The Coronavirus Business Interruption Loan Scheme (CBILS) had already been in place since March 2020, set up to provide access to loans and finance of up to £5million. The Coronavirus Large Business Interruption Loan Scheme (CLBILS) offered mid-sized and larger businesses with financing of up to £200 million. In contrast, the purpose of the BBLS was to prop up micro SMEs with smaller, fast track loans as a means of weathering the COVID storm.

The appeal of the BBLS

Take up for the BBLS was immediate. By 17 May 2020, more than £14bn worth of bounce back loans had been approved. By the time the BBLS closed, the value of facilities approved (including those that had been "topped up" to the maximum £50,000) stood at £47.36bn.

Although the scheme only offered loans of up to £50,000, the BBLS accounted for the lion's share of lending. Of the c. £79bn granted in COVID loans, the value of the facilities approved under the BBLS accounted for more than the CBILS and the CLBILS loans combined.

A key difference between the interruption loans and the bounce back loans was the application process. While potential recipients of a CBILS loan had to produce borrowing proposals, backed up by accounts and details of assets, micro SMEs could fill in a short online questionnaire and self-certify their suitability for a loan.

In percentage terms, nearly 75% of all BBLS applications resulted in facilities being approved, compared to 43% of CBILS applications and 65% of CLBILS applications.

Scrutiny of the BBLS

Naturally a bigger loan calls for greater due diligence but, beyond the usual KYC checks, lenders of bounce back loans were not required to carry out any borrower viability tests at all. Such tests take time, and a key purpose of the BBLS was to provide loans quickly. The government has since faced criticism however, for apparently failing to adequately plan for the recovery of bounce back loan debt.

Perhaps at the time the BBLS seemed prudent. The country was in lockdown: all “non-essential” high street businesses were closed and people were required by law to stay at home. UK business teetered on an economic cliff-edge. But even in that context, it does seem remarkable that the scheme enabled 100% government backed borrowing of up to £50,000 with no security, no indication whatsoever that the loan could be repaid, and on the basis of a self-declaration only. Aside from how the debt could be recovered, the lack of oversight also made the BBLS ripe for abuse.

While furlough fraud was highly publicised in the media, it is only relatively recently that the scale of the loans scheme fraud has come to the fore. In October 2021 the Insolvency Service announced that it was cracking down on Bounce Back loan abusers, and this year the government has faced criticism for its apparent short-sightedness in launching the schemes. In April 2022 the Public Accounts Committee accused the Department for Business, Energy & Industrial Strategy (BEIS) as being complacent in preventing fraud in the BBLS. Dame Meg Hillier MP, Chair of Committee, criticised the lack of focus on the "lower-level fraudsters who may well just walk away with billions of taxpayer's money".

British Business Bank, the government-owned (but independently managed) development bank behind the schemes, is of course keen to highlight the positive impact of the loans. A year after the introduction of the schemes, the Bank appointed market researchers Ipsos, along with policy consultants London Economics, to carry out an evaluation of the three schemes. The first phase of the evaluation, published on 14 June 2022,  estimated that without the schemes an additional 10%-34% of BBLS borrowers (146,000 to 505,000 businesses) could have permanently ceased trading in 2020. Significantly the report suggests that, in view of the volume of applications under the BBLS, had lenders conducted their usual checks this would have created a backlog with businesses "waiting significantly longer for a loan during which period the survival of the business may have been at risk".

Clearly though the benefit to business must be balanced against the potential loss to the taxpayer, which is predicted to run into the billions.

Pursuing abusers of the BBLS

There does appear to be a gathering momentum in the pursuit of BBLS abusers. The Insolvency Service has recently reported the first successful criminal prosecution for abuse of the scheme. On 24 June 2022 Manchester Crown Court heard that Abdulrazag Zagroba, sole director of Amigo Pizza (Manchester) Ltd, had applied for a loan under the BBLS after applying to dissolve his company. In his application for the loan, no mention was made of the dissolution process, rather Mr Zagroba confirmed that the company would be able to make repayments. Mr Zagroba received a loan of £20,000: he spent £6,000 on a car and arranged for friends to travel with around £14,000 in cash to give to his family abroad. Mr Zagroba received a two year custodial sentence for fraud by false representation and was disqualified from acting as a director for 7 years.

Chief Investigator at the Insolvency Service Julie Barnes said "[t]his sentence should serve as a warning to others who engaged in this behaviour, and they should come clean and repay the money before it is too late". While the prospect of prosecution and a prison sentence may encourage some to come forward, it seems unlikely that BBLS fraudsters will be queuing up to repay their ill-gotten gains.