£1 billion Scottish warning as Covid loan defaults set to eclipse fraud write-offs

Scotland could see £1 billion of defaulted Covid business loans as firms struggle to repay cash lent to them by government support schemes, experts have warned.

The £4.3bn of Covid loans UK-wide that may have to be written-off by the Treasury due to fraud, and highlighted by the resignation of Lord Agnew last week, could be eclipsed by companies failing to repay their coronavirus business interruption loans (CBILs) and bounce-back support loans, according to Blair Milne, head of restructuring with accountancy and business advisory group Azets in Scotland.

More than £73bn has been loaned under the schemes to around a quarter of UK businesses by banks, building societies and other accredited lenders. This includes more than 1.5 million bounce back loans, 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.

While there is widespread acceptance that the support schemes have helped many businesses to survive the challenges of the pandemic, concerns have grown over potential losses and fraud.

Blair Milne, head of restructuring with accountancy and business advisory group Azets in Scotland, issued a stark warning.

Last year, it was estimated that 37 per cent of bounce-back loans (BBLs) 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, more than £4.1bn has been loaned to around 100,000 businesses, of which Azets forecasts that some £1bn is likely to go into default.

Milne warned that it was highly likely that the value of defaulted loans will far outweigh the amount written off due to fraud.

He said: “A substantial and increasing number of businesses are already struggling to make their CBILs or bounce-back loan repayments.

“Businesses and particularly small and medium-sized enterprises 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.

“The CBIL and BBL 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,” he added.

“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.”

Azets pointed out that while the loans are government-backed - 80 per cent for CBILs and 100 per cent for BBLs - and the debt is due to the lender, late or non-payment will ultimately be pursued and investigated by HMRC.

A message from the Editor:

Thank you for reading this article. We’re more reliant on your support than ever as the shift in consumer habits brought about by coronavirus impacts our advertisers. If you haven’t already, please consider supporting our trusted, fact-checked journalism by taking out a digital subscription: www.scotsman.com/subscriptions