The government’s Bounce Back Loan Scheme (BBLS) provided a lifeline to businesses during the COVID-19 crisis. The largest of three COVID-19-related business loan support schemes, the Bounce Back Loan programme targeted small businesses struggling to stay afloat and sought to provide them with loans of up to £50,000, or a maximum of 25% of annual turnover.
The scheme was implemented at significant speed during the first lockdown in 2020. However, while it succeeded in protecting businesses and jobs at a time of unprecedented uncertainty, there is now mounting concern that fraud and error will all end up costing the taxpayer billions of pounds.
Bounce Back Loan Scheme – the facts
The Department for Business Energy & Industrial Strategy (BEIS) launched the scheme on 4 May 2020, and closed it to new applications on 31 March 2021. The British Business Bank (BBB) manages the scheme and the loans were delivered through 24 commercial lenders, such as banks, peer-to-peer lenders and non-banks.
Aiming to deliver money to borrowers within 24 to 48 hours of applying, given the urgency of the situation, the loan application process was extremely streamlined and simple. Lenders were not required to perform credit and affordability checks on borrowers, instead relying on them to provide accurate information. Owing to the absence of credit checks, the government provided lenders a 100% guarantee on the loans, meaning that if the borrower fails to repay the loan, the government will cover these losses.
No fees or interest were payable during the first 12 months of the loan, with the government shouldering these costs. Now that the interest-free period has expired, loans have a fixed interest rate of 2.5% a year, with a maximum life of 10 years.
The BBB delivered 1.5 million loans to small and micro-businesses under the bounce back support scheme, worth £46.8 billion in total at the time the scheme closed in March 2021.
This was much higher than expected at launch, with the BEIS and the BBB initially estimating that the scheme would support between 800,000 and 1.2 million businesses with loans worth a total of between £18 billion and £26 billion.
Most of these loans were issued within the first two months (64.6% of the scheme’s funds), highlighting the urgent need for such a scheme during the depths of the first lockdown. By the end of November 2020, the scheme’s original deadline, the scheme had disbursed more than 90% of loans by value. In total, approximately one quarter of all UK businesses received a Bounce Back Loan (1.5 million loans out of a total of six million UK businesses).
Where did these loans go?
According to analysis by the National Audit Office, using data from the BBB, the average loan size was £30,340. In addition, 58% of the total value loaned under the BBLS was through loans at the maximum value of £50,000.
In line with the scheme’s main aim of providing support to smaller SMEs, more than 90% of loans by number went to micro-businesses, amounting to a total of 1.4 million loans worth £39.7 billion.
In terms of geographic distribution, the number of loans and the relative amount lent broadly followed the concentration of businesses in various parts of the country. Indeed, the highest proportion was found in London, which received 20.6% of total loans, slightly more than its 18.7% share of UK SMEs. Businesses in the South East were offered 13.9% of total loans, against its 15.7% share of UK SMEs; while firms in the North West received 10.5% of loans, slightly more than its 9.4% share of UK SMEs. No other region accounted for more than 10% of total loans individually.
In contrast to the distribution of loans by region, the breakdown by sector does not reflect the concentration of businesses across the economy. The Wholesale and Retail Trade sector was the largest recipient of loans by value, worth £8.2 billion (17.5% of the total), vastly exceeding the sector’s 9% share of the UK business population.
Similarly, the Accommodation and Food Service Activities sector, the fourth-largest user of BBLS loans at £4.3 billion (9.1%), received a much higher proportion of loan finance compared to the sector’s proportion of the UK business population (3.7%). This is not surprising, as businesses in this sector, such as restaurants and hotels, were among the most affected by forced closures and the total halt in tourism and travel during the first lockdown.
In contrast, businesses in the Professional, Scientific and Technical Activities sector, which were offered £4.9 billion in total (10.3%), received a lower proportion of loans relative to the sector’s share of overall businesses (14.6%). The construction industry’s share of BBLS loans by value (16.3%), equivalent to £7.7 billion, was in line with its share of the UK business population.
Fraud concerns
The BBLS has recently come under intense public scrutiny due to the potential for large-scale fraud. Last month, the House of Commons’ Committee of Public Accounts published a report accusing the BEIS of complacency towards fraud. The MPs authoring the reports voiced concern about the scheme’s reliance on commercial lenders to manage the risk of credit and fraud losses.
The report argued that there is no incentive for lenders to prevent fraud and pursue borrowers, because, under the scheme’s own design, the government guarantees to cover 100% of lenders’ losses, meaning that the taxpayer foots the bill for potential losses. In addition, at the time of its rollout, the scheme came with minimal checks on borrowers. Businesses were simply required to self-certify their application details, including the turnover of the business, with light checks by banks to verify these figures.
The government has defended the BBLS, considered its flagship COVID-19 business support scheme, citing the need for the scheme to be operational quickly in order to lend to small companies facing collapse in the early months of the pandemic. Nonetheless, it has acknowledged that a large chunk will inevitably be lost.
An initial estimate by PricewaterhouseCoopers (PwC) for the BBB in March 2021 forecast that, out of the £47 billion paid out in bounce back loans, as much as £17 billion would not be recouped, including £4.9 billion lost to fraud and error. However, these figures are highly uncertain, with anticipated fraud and error recently revised down by PwC to approximately £3.5 billion.
Banks themselves have been proactive in reporting fraudulent claims. Their own independent investigations have found numerous errors in the way the loans were originally processed, as well as instances where companies were ineligible but still received loans, including cases of companies created after March 2020, which was against the terms of the scheme. This has led the government to remove the guarantee from more than 7,400 Bounce Back Loans worth more than £240 million, according to analysis by the Financial Times published in January 2022.
In response to criticism over the lack of resources to recover the money lost through fraud, in April 2022 the Treasury announced plans to create a counter fraud task force of data experts and investigators by the summer. The new authority will increase the government’s effort to find fraudsters that took advantage of the BBLS and other COVID-19 support schemes. Regardless of the amount of money that the government is eventually able to recoup, it is clear that the situation will take a considerable number of years to be resolved.
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