A report distributed by Business Rescue Expert claims that defaults of Bounce Back Loan Scheme (BBLS) could cost HM Treasury up to £27 billion.
BBLS is a key business support program launched by the UK government to help backstop the stumbling economy that was pummeled by the COVID-19 health crisis.
According to the British Business Bank, the entity that managed BBLS, 1,531,095 Bounce Back Loans worth £46.5billion, were issued to UK businesses. The Bounce Back Loan Scheme Top-Ups showed 101,666 approved for £0.9 billion.
Bounce Back Loans targeted small and micro businesses, providing loans from £2,000 up to 25% of the business’ turnover with a maximum loan of £50,000. These loans provided lenders with a 100% government-backed guarantee and many loans were available within days. These loans held a six-year term at a government set interest rate of 2.5% a year. The government will cover interest payable in the first year.
Borrowers applied for the loan through accredited lenders, including Fintechs.
Business Rescue Expert reviewed repayment projections from various data sources and has provided three different possible scenarios. According to the report, the best case is with a 15% default rate; a median case is a 40% default rate and a worst case scenario is 60% default rate.
Chris Horner, Insolvency Director with Business Rescue Expert, said these figures illustrate not only the size of the support measures that were available to businesses to borrow during the pandemic lockdown but also the potential cost if they can’t be repaid.
“In the first quarter of this year alone, over 42% of the liquidation cases we’ve handled had taken out a BBLS, and the average amount borrowed averaged £37,500 per company. As the first loan payments for the BBLS come due, businesses will have to seriously look at their ability to pay and their calculations might have been affected by not being able to reopen earlier than this month at best. Businesses that have topped-up their initial BBLS loan will also find out that not only are they unable to defer these payments, but they’ll come out at the same time as their original loan repayments – an unwelcome and expensive surprise.”
Of course, many businesses were profoundly impacted by government-mandated lock-downs – thus no fault of their own. In the end, it will take some time to effectively analyse the benefit and cost of BBLS, along with the other COVID support programs.