Covid loans: An escalating crisis

September 7, 2022

The covid loan schemes

The government’s speedy launch of the various Coronavirus Business Support loan schemes when the pandemic struck in 2020 was one of the most important planks in the raft of measures intended to prevent viable businesses from failing as Covid ravaged the UK economy. By May 2021 when the schemes closed to new applications, a total of some £80bn had been lent to 1.67m businesses.

Unfortunately, some very serious cracks are appearing now in the schemes, affecting lenders, borrowers and the government as guarantor of the loans.

Defaults on covid loans

A certain rate of default was always inevitable, especially given the lack of traditional credit underwriting for the largest of the schemes, which provided no-questions asked Bounce Back Loans of up to £50k. Initial estimates of write offs was soon revised upwards as the pandemic lingered on for two years, delaying when economic recovery could truly start.

The loans were made over a twelve month period ending in May 2021, most involving an initial one year repayment holiday for both interest and capital so that defaults triggered by non-payment started around that time but now repayments are now due on all of the loans.

The Department for Business, Energy and Industrial Strategy has now revealed that £414 million has so far been paid out to cover loans that have gone bad. It estimates that around one in 12 businesses have already defaulted on the Government-backed loans they took during the pandemic. This data is still provisional and the final figures are likely to show much higher numbers. Even before the latest economic crisis, it was estimated that write offs from the loans schemes could easily be a quarter or more of the advances (some £20bn+), mostly on Bounce Back loans. Now the prognosis is potentially far worse

The energy crisis

Almost all the public concern so far about the savage price increases for energy have been understandably focused on the bleak prospects for households, but gradually this is broadening out to include the impact on businesses, which have no protection from any price cap. Stories are starting to fill the media, reporting that as fixed tariffs from before the crisis expire, renewal quotes for up to five or six times the previous costs are commonplace.

If the government cannot come up with a workable and very quick fix, droves of energy-reliant businesses will close or have be mothballed. There is talk of hotels, pubs and restaurants considering closing for the winter, or severely restricting opening hours. Not only is this a financial tragedy for the owners and the staff, but how can these businesses hope to continue to pay back their Covid loans?

The cost of living crisis

Aside from the rapid escalation of input costs, consumer-facing businesses are seeing customers rein in their spending, with worrying implications for their turnover in the short and medium term. This will seriously damage bottom line profitability and also limit their scope to keep repaying Covid loans.

Fraud and covid loans

Many voices have expressed concern about the level of fraud associated with the Covid loan schemes, especially with Bounce Back loans. HMRC continues to pursue those it believes were not entitled to the loans they obtained. The government has invested over £100m in a Taxpayer Protection Taskforce to combat fraud in the HMRC-administered Covid-19 schemes, including the loan schemes. Up to the end of March 2022, it had opened nearly 41,000 one-to-one compliance interventions and contacted over 63,000 people via one-to-many campaigns. In July 2022 it had 1,100 staff dedicated to the taskforce. The feeling is that the ‘low hanging’ fraud cases have been actioned, but that the focus now is on more marginal mis-use of government support.

What next for those business with covid loans?

There are two areas where businesses need to take action:

Repayment flexibility

The covid loan schemes, especially the Bounce Back scheme, provide borrowers with generous options to defer or re-schedule repayments. If there is doubt about the ability to maintain repayments short term, it is well worth exploring these options with the lender assuming that these possibilities have not already been exhausted. But before doing so, businesses will need to have reviewed their financial position so that both parties have a factual basis for any negotiation.

Possible fraud

If there is any doubt about eligibility for the loans taken out and their subsequent use, the sensible course of action is to approach your lender to discuss the issues. It is much more likely that a settlement can be reached and penalties avoided if the borrower is open about the possible mis-use, rather than waiting for the lender or the taskforce to expose the problem.

Can the business survive?

It may be that deferring repayments is simply delaying the inevitable and that there is no future for the business. Owners and managers need to face this reality and get expert advice about their options as a matter of urgency. Delaying in the hope of something turning up has never been the best option and in these challenging financial times it should not even be considered.

As a Group, Opus is here to advise and help businesses facing financial and operational challenges. We have extensive experience of identifying and implementing positive solutions in these scenarios. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.

Covid loans: An escalating crisis