The value of Covid loan defaults could more than quadruple the estimated £4.3 billion that may have to be written off by the goverrnment due to fraud, a restructuring expert has warned, with Scotland likely to see more than £1bn of defaulted business loans.
Azets has estimated that as much as £20bn of the £73.8bn provided under the UK's Bounce Back Loan (BBL) and Coronavirus Business Interruption Loan (CBIL) schemes during the early part of the pandemic will go into default as firms struggle to make repayments amid rising costs and the end of local authority grants.
Blair Milne, head of restructuring for Azets in Scotland, said this would dwarf the amounts lost to fraud which prompted accusations of "schoolboy errors" from Lord Agnew during his dramatic public resignation last week.
“A substantial and increasing number of businesses are already struggling to make their CBILs or BBLs loan repayments," Mr Milne said. "Businesses and particularly SMEs have had to endure an exceptionally difficult two years and whilst many have closed, many of those which have persevered have only managed to survive due to the loans and other government-backed interventions such as furlough.
"As a result, we believe that, across the UK, as much as £20bn of all CBILs and BBLs loans – or more than twice the initial fraud estimate – will become defaulted in some shape or form."
A total of £73.8bn has been loaned under the schemes to approximately a quarter of UK businesses by banks, building societies and other accredited lenders. This includes more than 1.5 million BBLs worth £47.4bn - where businesses were provided with a loan of up to £50,000 or a maximum of 25 per cent of annual turnover - with the government guaranteeing the repayments.
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Despite widespread acceptance that the support schemes have helped many businesses survive the pandemic, Mr Milne said concerns have grown over potential losses and fraud within the BBL scheme in particular. In 2021 the Department for Business, Energy and Industrial Strategy (BEIS) estimated that 37% of BBLs worth some £17.5bn may not be repaid, mostly because the businesses concerned would not survive over the longer term.
By the end of September 2021, the state-owned British Business Bank, which oversees the schemes, disclosed that £2bn worth of loans had been repaid, however £1.3bn worth of loans were in default. In Scotland alone, more than £4.1bn has been loaned to around 100,000 businesses, of which Azets forecasts that more than £1 bn is likely to go into default.
“The CBILs and BBLs loan facilities ended in March last year which coupled with the ending of local authority grants and furlough will be causing severe cash and liquidity problems for more and more businesses," Mr Milne said.
"Whilst most business owners have no intention of committing fraud, an increasing number are finding that their business lacks the assets, cash or income to meet loan repayment demands and deadlines. Although the banks have been instructed to be flexible, one way or the other loans will have to be repaid.”
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