Bounce back loans: Insolvencies, fraud and how accountants can help

A recent investigation found instances of Bounce Back Loans spent on luxury cars, jet skis and flying lessons.

It’s nearly three years since the UK Government accepted the last application for a bounce back loan.

Launched in May 2020, the scheme aimed to help SMEs survive the COVID-19 pandemic. It provided businesses with loans of 25% of their turnover to a maximum of £50,000 on generous terms – a 2.5% interest rate over a six-year period, with no repayments required in the first 12 months.

At a total value of £47 billion, 1.5 million loans were issued – and many SMEs were grateful for the relief.

However, the scheme is now under fire.

In October 2020, the National Audit Office announced that £15-£46 billion of bounce back loans would never be repaid. In August 2022, the BBC reported that more than 16,000 businesses with loans had become insolvent. By June 2023, nearly £1.7 billion worth of loans showed signs of fraud, according to The Guardian.

Why has the scheme caused such controversy – and what can accountants do to help?

It wasn’t all bad

Before diving into the dark side, it’s important to note the scheme’s advantages.

“[It] provided safety and stability for many SMEs due to the availability of the funds and the flexible repayment terms,” says Vincent Billings, Partner, Corporate and Commercial Team, SA Law.

“While some SMEs used the funds to cover costs during the COVID downturn to ensure the business could survive, many profitable businesses applied for loans as a precaution, put the money aside in a separate reserve account and never touched the funds.

“In this situation, the loans were repaid prior to any interest or capital repayments.”

More haste, less speed

In most cases, businesses received funds within 24-48 hours of applying. However, the flipside of such a hasty approach was that sufficient precautions weren’t taken.

Businesses were allowed to self-certify their details, and the usual credit and affordability checks were not required, reports the National Audit Office.

Consequently, in some cases, businesses that were already on the rocks were allowed to borrow.

“Many simply took out loans they couldn’t afford to pay back,” says Dominic Dumville, Corporate Restructuring Partner, Mercer & Hole.

“They would have struggled to get finance in ordinary circumstances.”

In other cases, individuals deliberately took advantage.

The value of bounce back loans flagged for fraud increased by 43% – from £1.1 billion to £1.7 billion – between March and June 2023, according to The Guardian.

“Some directors used the funds for their personal benefit rather than for company purposes,” says Aman Sehgal, restructuring and insolvency partner, Keystone Law. “Some dissolved the company to avoid repaying the loan.”

Such directors, if caught, pay a heavy price.

“Insolvency practitioners dealing with companies that took bounce back loans are obliged to check and report upon the legitimacy of the original application, and whether the funds were used correctly – for continued trading,” says Isobel Brett, Insolvency Practitioner, Bretts Business Recovery.

“In the event that the funds were misused, then the director may face disqualification proceedings and being banned from acting as a director of another company for a period, and may be required to provide financial compensation to the company and its creditors.”

More than 600 company directors were disqualified between April 2022 and June 2023 for abuse of COVID-19 financial schemes, mainly involving bounce back loans.

“One roofer applied for a £13,000 loan and spent it on gambling in three weeks, while another director applied for a loan and used it to buy class A drugs,” write Jon Ungoed-Thomas and Sophie Smith. Others spent the funds on luxury cars, jet skis, flying lessons “and even pornographic websites”.

While an effort was underway to identify and prosecute cases of fraud, “MPs, campaigners and those involved in the law enforcement effort are worried,” the report said. “They have told the Guardian that efforts to recover the money are underfunded. They say government agencies have asked ministers for more cash, but it has been refused.”

What happens to genuine SMEs that can’t repay?

SMEs that are unable to repay bounce back loans have options.

“There may be an opportunity to renegotiate the terms of the loan with the provider,” says Brett. “The Government’s Recovery Loan Scheme is still available to some.”

Renegotiation might include “requesting an extension of the loan term, reducing monthly repayments for a period to interest only, and/or taking a repayment holiday. This is part of the ‘Pay As You Grow” (PAYG) Scheme,’ says Sehgal.

If renegotiation isn’t feasible, then insolvency might be inevitable – but with help.

“The bounce back loan scheme is ultimately 100% government-backed,” says Brett.

“In the event that a company enters a formal insolvency, the scheme provider can, first, rely on any security it may have in place against company assets (a debenture incorporating a fixed and floating charge and filed at Companies House), or otherwise their guarantee from the government,” says Brett.

“Personal guarantees were not allowed for bounce back loans; so, there is no risk to personal assets, unless, of course, the business was not trading through a limited company.”

A sole trader will become responsible for the loan, personally.

“However, while they can be made personally liable for a Bounce Back Loan, according to the British Business Bank, which implemented the scheme on behalf of the government, recovery action cannot be taken against a main residence or main personal vehicle,” Eleanor Stephens, Senior Recovery & Insolvency Solicitor with Harper James wrote in May 2023..

“However, other personal assets can be recovered and ultimately the lender could apply for bankruptcy to recover the debt, and then pursue the residence and vehicle.”

How accountants can help SMEs with outstanding loans

“This will differ for each business,” says Billings.

“In some circumstances, it may be appropriate to repay early; for example, if the cash is not required for the business and is just acting as a safety net.

“On the other hand, businesses that have utilised the loan funds to assist with recovery will need to plan repayments carefully as part of their financial business plan.”

Sehgal adds, “If a business is struggling to make repayments, the directors should consider the benefits of the [PAYG scheme] in allowing the business breathing space, while directors focus on profitability.”

Either way, companies shouldn’t wait.

“My advice to any business owner is to talk to experts sooner rather than later and don’t bury your head in the sand as, the earlier you take action, the better your longer-term position,” says Dumville.

“Bounce back loans are often just one piece of the jigsaw of debt. It has been too easy for businesses to get credit over the past decade and, with the perfect storm of the cost of living crisis, wages and materials inflation, and higher interest rates, problems have grown worse for many directors.”