Small-Business Emergency Loan Program in the UK Threatens to Descend into Chaos

A goldmine for enterprising criminals. Even legitimate borrowers face sky-high default rates. Taxpayers to eat the losses.

Demand continues to surge for the UK’s Bounce Back Loan (BBL) program, which provides cheap emergency lending to small and medium-sized businesses. On Wednesday, HSBC announced it was having so much difficulty processing the deluge of new applications that it has decided to halt pandemic lending to new business customers.

The BBL program was first launched in May. Since then, £38 billion has been lent to 1.26 million businesses — in a country of roughly 5 million businesses. SMEs are able to borrow up to 25% of their revenues to a maximum of £50,000 under the program. The loans, interest-free for 12 months, are administrated by private-sector banks, but are 100% backed by the government.

Besides the Bounce Back Loans, banks have also lent £15.5 billion to 66,600 mid-sized businesses (with revenues up to £45 million) through the Coronavirus Business Interruption Loan Scheme (CBILS), and £3.5 billion to 566 large businesses (with revenues over £45 million) through the Coronavirus Large Business Interruption Loan Scheme (CLBILS). Both loan programs are 80% guaranteed by the State.

In total, £58 billion has so far been disbursed across the full gamut of the UK’s coronavirus emergency lending programs — the equivalent of 2.6% of GDP. That’s relatively low compared to some countries. In France, for instance, companies have received €106 billion — the equivalent of roughly 4% of GDP. In Spain, the state-owned bank ICO has guaranteed over €100 billion in business loans — almost equivalent to 10% of GDP.

Before the BBL program was launched, very little emergency lending was actually reaching small UK businesses, partly due to voluminous red tape but also because 80% of each loan was guaranteed by the state, meaning that banks had to assume 20% of the risk of non-payment on loans that they knew had extremely high risk of non payment. Hence the decision by the government to provide 100% backing for the Bounce Back Loans.

The loans are also self-certified, making them quick and easy to process. Because banks are not liable for any unpaid debts, they are quite happy to release the funds with little in the way of background checks. This has created a goldmine for enterprising criminals.

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