Bounce Bank loans could be a ticking time bomb for struggling businesses

A recent report by the National Audit Office has cast significant doubt on the validity of over 10% of all Bounce Back Loans issued to support business during the Covid restrictions in 2020 and 2021. Moreover, these loans could turn out to be an enormous liability for some business owners, leaving them liable to prosecution and imprisonment.

What is the Bounce Back Loan Scheme?

The Bounce Bank Loan Scheme was originally set up in April 2020 by the Government to help small and medium size businesses by providing quick access to emergency finance during the Covid-19 restrictions. With almost all business in the UK feeling the impact of lockdown, the scheme was taken up by over 1.5 million businesses.

Launched by the Department of Business, Energy and Industrial Strategy (BEIS), the loans were made available to businesses from May 2020 and meant that any qualifying business could borrow up to £50,000, or 25% of their annual turnover.

The loans were provided direct to businesses by commercial lenders such as banks, building societies and peer-to-peer lenders, and businesses were expected to repay the debt in full. Government gave lenders an extraordinary 100% guarantee against the loans, both the capital and the interest, meaning if the borrower does not repay the loan, the government will step in and pay the lender.

These loans were set with a fixed interest rate of 2.5% and a maximum length of 10 years. In addition to these generous terms, better than anywhere on the market at that time, the first year of the loan had no capital repayments due, with the government paying the interest.

To qualify for a loan a business only had to:

  • be based in the UK;
  • have been established before March 2020
  • must have been adversely affected by pandemic

With such a simple set of criteria, the lenders found themselves swamped with requests for loans. Over £47bn of loans were authorised to over one and a half million companies, almost half of the UK stock of business. Is it any wonder therefore that amongst the ‘feeding frenzy’ there were instances of fraud?

Scale of Bounce Back Loan Fraud

In a recent review by the National Audit Office (NAO) they highlighted that following an initial investigation in October 2020 they had identified a total estimated Fraud liability of £4.9bn, some 11% of all the money lent during this period. This is an enormous sum of money and one which could cause the Government some embarrassment.

The NAO outlined the main reasons for the scale of the fraud being:

  • Removal of standard credit and affordability checks
  • Allowing businesses to self-certify their application documents
  • Slow implementation of counter fraud measures

The Government were additionally surprised by the scale of applications for these support loans as initially, they had forecast demand to be between £18 and £26bn. The fact that the final figure doubled those estimates, in both the numbers of firms they went to and the sums involved, paved the way for the problems that subsequently followed.

In March 2021, an initial report by the DBIS suggested that up to 37% of the money lent , some £17bn, was unlikely to be paid back and with over 90% of the loans going to small and micro businesses, with turnovers less than £632,000 this suggests that the SME market place is in significant turmoil. As a consequence, forecasters now expect to see a raft of business failures during 2022/23 and as a consequence, a huge number of firms defaulting on their Bounce Back Loans.

Sitting atop this is a forecast £4.9bn of loans which are estimated to have been made fraudulently, with a suggestion that organised crime may be behind a large amount of this.

Can I be prosecuted for fraud if my business fails?

Within this confusion, the National Crime Agency commenced investigations and by the end of 2020 they had started to arrest individuals whom they suspected of being involved in fraudulently obtaining funds from the scheme. During 2021 these efforts intensified but by March 2021 they had still only arrested around a dozen people.

All of those detained are people suspected of being involved in deliberately trying to defraud the Government as part of organised fraud gangs, however there are worries that the imperative for the Government to be seen to be ‘doing something’ could mean that innocent business owners are also snagged in this trap.

With over 1,000 HMRC staff now looking at this, the focus is switching to firms which have gone into administration after receiving Bounce Back Loans and the spotlight is now firmly on business owners of failed firms.

Many people in this situation are genuinely in dire straits. They took the bounce back loans to keep their businesses afloat, but continuing Government restrictions on movement and the uncertainty of messaging around when we might expect to return to normal, meant their firms ultimately failed. No only are they faced with the problems of winding up their companies, and the trauma that entails, but they also face the prospect of being unemployed with no chance of being able to get a job and earn a living. The last thing they need, therefore, is to find that they are likely to be pursued by the Government for fraudulently obtaining a Loan that was supposed to help keep their business afloat.

Fuelling this fear, the Insolvency Service has been granted powers to investigate Bounce Back Loan fraud in cases where a company has been dissolved and investigations are growing month on month.

The latest recommendation being made to those investigating the loans, is that where a Company owner has received the bounce back loan directly into a personal bank account, if any of that money has been used by the owner to pay themselves, then this could be construed as fraud. The loans were expressly to keep businesses afloat and not to pay directors and owners, despite the fact that they needed to earn a salary to keep the business afloat. In an almost Catch-22 situation, owners who paid themselves to try and keep going and then went bump, could end up facing imprisonment.

Exacerbating this situation is the fact that the majority of the loans, over 90%, went to micro businesses and of those, a great many who were owner operators and not limited companies, operated with a personal bank account, not a business bank account. Anyone, therefore, who received the loan into their personal account could now be caught in an impossible trap. If the business fails, even though it may be through no fault of their own, they could end up being prosecuted for fraud.

Some commentators have suggested that this heavy handed approach to insolvency means that business owners will be fearful of seeking help, for fear of prosecution. Insolvency Practitioners are similarly conflicted in that they need to act in the best interests of their clients but cannot ignore a Government directive to report anyone who took personal funds from the Bounce Back Loan.

Walking this financial tightrope can be tricky and it is essential, therefore, that if you have taken a Bounce Back Loan and are facing financial difficulties, you should seek professional help from an Insolvency Practitioner as soon as possible. Once engaged, their priority will be to you as their customer and as long as you have not been deliberately fraudulent, they should be able to help you.

Irwin Insolvency has over 25 years’ experience providing expert advice to struggling businesses and companies.

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency, rescue and turnaround.