Debbie Cockerton outlines how companies that took advantage of the Bounce Back Loan scheme could be facing problems when repayment time comes after covid.
Lockdown continues – seemingly forever – and many businesses are facing very stressful and uncertain times. Cashflow is at an all- time low and as I write this the weather has turned very cold and snow is on the ground, which is also affecting the few businesses that have remained open.
As it is now over a year since the start of the pandemic, lots of small and medium sized companies that took out Bounce Back Loans are now having to think about starting to pay these loans back. The loans were originally set up by the government to help SMEs survive the pandemic and loans of up to £50,000, or 25% of their turnover, were offered. These loans came with no fees or interest to pay for 12 months and the interest rises to 2.5% the following year. As these loans were at such good rates, lots of businesses have taken advantage of borrowing extra money.
The government guaranteed 100% of the loan, so is a company ceases to trade, enters an insolvency option or can no longer pay it back, then the government will pay the loan back to the banks. At the time, the loans were being taken out in vast numbers and perhaps the necessary checks were not being done. It is reported that nearly 60% of these loans could go unpaid due to defaults and fraud. An estimated £15billion to £26billion could not be paid back, which will leave a massive hole in the economy.
There are reports that some company bank accounts have been frozen, where the banks have reason to believe that a fraudulent bounce back loan was made, and there are reports that one bank wrote to a customer to notify them that the bank had formally terminated the loan and requested repayment of the loan in full immediately.
There have also been arrests made – three people were arrested in Birmingham – but no convictions have happened to date. Raids were carried out on the 30 October 2020 by the National Investigation Services (NATIS) and the National Crime Agency (NCA).
Fraud teams are now scouring business accounts that received a Bounce Back Loan to try to identify those businesses that are dormant since the funds were withdrawn. As we are only just coming up to the period when the loans must start to be repaid this seems an enormous task to undertake.
Debt collectors have also started to be used to collect missing payments and new departments have been set up to tackle this massive problem. Any fraudulent applications may be criminally prosecuted, and this can lead to imprisonment or a fine, or both.
One of the big concerns is that, with the high volume of applications for the loans and the speed needed to get these monies to businesses that were struggling, security checks were not undertaken as rigorously as they should have been. The government may refuse to pay back any loans that they consider fraudulent and those potential fraudulent applicants may have to prove their innocence.
It is concerning that some of the monies could have been attributable to proceeds of crime and the banks will also have to try to identify this risk. All of this will take extra time – and at a time when most businesses are struggling, where is the extra time going to come from?
At DCA Business Recovery we are already seeing an increase in enquiries from companies that have taken out a Bounce Back Loan, and they are very concerned that they are unable to make the payments on these loans, as their cash flow and business has not improved as they had anticipated nearly 12 months ago. Companies have faced a devasting year, which will have a knock-on effect and will cause widespread business failures in 2021 and beyond. If the loan monies are still there, then there is not a problem, but if the monies have been used in the ordinary course of trading, then the businesses may be insolvent and unable to pay their debts as they fall due.
This is the ideal time for directors to take advice from an insolvency practitioner and care should be taken when considering the best action to take when a company is financially struggling.
• Debbie Cockerton is a partner at DCA Recovery