October 7, 2020
C-Suite Wednesday – UK Expects 40% – 50% Default Rate on Small Business Emergency Loans
The coronavirus pandemic has had a tremendous impact on small businesses internationally. While the U.S. was focused on PPP and EIDL, the UK was relying on the Bounce Back Loan (BBL) program in order to save their 5 million SMBs. Since the BBL program was first launched in May, £38 billion has been lent to 1.26 million businesses. Similar to PPP, BBL are 100% backed by the government and rely on self-certifications. However, instead of offering forgiveness, the UK’s program provides loans through private-sector banks that will remain interest-free for 12 months. Despite having good intentions, the BBL program is now suffering from rampant fraud and is expected to see a 40% to 50% default rate.
According to the UK’s National Crime Agency (NCA), criminals are getting hold of individuals’ personal details using phishing emails and setting up fake companies in their names. They are then setting up business bank accounts, and applying for Bounce Back loans. Although program rules state that businesses set up after March 1, 2020, are ineligible, BBC has reported that applications have been successful for companies created as late as June.
UK lenders are also beginning to voice their concerns about the potential of seeing high default rates for economic recovery loans. Lenders estimate that up to 70% of BBL borrowers have never borrowed before. These companies are taking on large volumes of debt for the first time while trying to weather the virus and generating a lot less in revenues. As a result, the UK’s Chancellor of the Exchequer expects borrowers to default on £23 billion.
Although small businesses across the UK are still seeking BBLs, many lenders have stopped offering the program and all 28 accredited lenders will only offer BBLs to existing customers. Thus, making it more difficult for struggling small businesses to get the funding they need to survive.