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.

By Nick Corbishley, for WOLF STREET:

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.

The UK government was repeatedly warned about the risk of fraud before launching the program, it was revealed this week. In early May, just two days before the program was launched, the chief executive of the state-owned British Business Bank, Keith Morgan, warned that the program was at “very high risk of fraud” from “organised crime.” The bank, he said in a letter to Business Secretary Alok Sharma, could not guarantee “robust controls”:

“The scheme is vulnerable to abuse by individuals and by participants in organised crime. Alongside the fraud risk, there will be considerable credit risk in the current economic environment, which will be exacerbated by removing significant elements of the credit checks that would otherwise have been undertaken.”

Fake businesses have been set up to access the cash, the National Crime Agency (NCA) said on Friday. Here’s how it works: Gangs get hold of a victim’s personal details using phishing emails or by purchasing them online. They then set up a fake company in his or her name. After opening a business bank account, they apply for a Bounce Back Loan through the same bank. Although the rules state that firms set up after March 1, 2020 are ineligible for the program, applications have been successful for companies created as late as June, reports the BBC.

There’s also the growing risk that many of the loans will end up in default. According to the Chancellor of the Exchequer, Rishi Sunak, taxpayers could face losses of up to £23 billion in bad loans across the state coronavirus emergency bailout schemes. That’s the equivalent of 40% of all the money lent out.

That could prove to be on the low side. In June, a report from the Recapitalisation Group, a task force assembled by The CityUK, one of the UK’s most powerful financial lobby groups, and EY forecast that up to £36 billion worth of government-backed business loans — 62% of the current total — could become toxic by March of next year.

One of the problems is that many of the small businesses that have taken out emergency loans in the wake of the lockdown have no history or experience of borrowing or repaying debt. Lenders estimate that up to 70% of BBL borrowers have never borrowed before, equating to over 700,000 small- and medium-sized enterprises (SMEs), according to The Financial Conduct Authority (FCA).

These companies have taken on large volumes of debt for the first time ever, merely to weather the virus crisis while, in many cases, generating a lot less in revenues. Many of them, particularly those in the sectors most affected by the crisis, now have much weaker cash flow — hence the need for the debt.

Emergency business loan borrowers do not have to begin paying back the loan in the first year of its duration. It’s when the first year is over, which in many cases will be in June or July next year, when the real pressures will come to bear.

“Month 13 is going to be an interesting moment,” says Metro Bank PLC CEO Dan Frumkin. “It is the moment when people need to start paying back the [Bounce Back Loan Scheme loans], and we fully expect there will be a significant amount of defaults.”

In the UK, forbearance is scheduled to end at the end of this month, as, too, is the government’s job retention program. The ending of these two programs at exactly the same time is likely to heap a whole lot of extra pressure on struggling businesses and their owners. Old debts, including mortgages, will once again come due, at the same time that companies will have to start paying their staff’s full wages, for the first time in seven months. More than a third say they plan to lay off staff over the next three months, according to a YouGov survey.

Attention is now turning to how to deal with the fallout, including the anticipated surge in non-performing loans. It’s a problem all European countries will soon have to face, especially those where emergency lending to distressed businesses has been provided on a much larger scale than in the UK.

UK Finance, a lobby group representing UK-based banks, is weighing up creating a debt collection entity to be used by all British banks faced with recovering unpaid coronavirus loans. The European Commission is looking at ways to securitize bad loans at the EU level and offload them to global investors, as was recently done, with a certain degree of success, in crisis-hit Italy.

Other policy suggestions include a straight “state debt for equity” swap; forgiving all coronavirus small business debt (and probably later all coronavirus business debt), as recently proposed by former UK Chancellor George Osborne; and lastly, converting coronavirus debt that can’t be paid back into an income contingent loan collected as a share of trading profits. The debt would come due only when a company begins turning a profit. All of these proposals have one thing in common: the government, whose debt is already soaring, will essentially foot the bill. By Nick Corbishley, for WOLF STREET.

Another 34% markdown. The haste with which creditors want to execute the sale adds to the gloom. Read… Hong Kong’s Overleveraged Commercial Real Estate Tycoons Unravel, Prices Plunge, Creditors Begin to Take Over

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  33 comments for “Small-Business Emergency Loan Program in the UK Threatens to Descend into Chaos

  1. historicus says:

    The taxpayer money barely covers anything..
    the remainder is covered by central banking “magic”…
    plate spinning…

  2. Paulo says:

    Amazing story and article. What ever happened to a business requiring a track record for any loan, pandemic or no pandemic.

    I know someone here, in Canada, who has an automotive repair business that he has operated for 30+ years. There are 3 full time employees, all licensed techs. He applied for an emergency interest free loan of the Canadian version of this story. It was this past March. Unfortunately, eligibility was based on February receipts, and had to be compared to proceeding February(s) to indicate enough of a revenue drop in order to qualify for the loan conditions. Also unfortunately, Feb is the slowest business month for him and always has been. Thus, he did not qualify. He just had to suck it up and make his expenses the best he could.

    Centralised and universal conditions do not work. Decisions on who qualifies should be done in the community in both instances. The idea of lending rescue money to a new company should come with a penalty. I wanted to say it is criminal :-)

    One has to admire these enterprising crooks. Hopefully, they recycle the money with a bunch of local spending.

    • Xabier says:

      The founder of a very successful pottery company in England described how in the days when banks really did due diligence on loans she had an intimidating interview in a grand room, armed with sterling references, with a manager who reluctantly allowed her a very small loan and limited overdraft.

      Such bank mangers hardly exist now, and the grand premises she went to is now a trashy clothing retailer.

      When banks put signs in their windows in the UK reading ‘Loan Sale!’ it was all over…….

    • wiley says:

      The government and centralbank policy makers know Exactly what they are doing and it is Not helping businesses.Look at the design of the program which is exactly like the u.s. Program. HSBC and others were just fined for blatantly moneylaundering. If the central banks/FED wanted to bring down the banks and the issue trackable blockchain digicurrency,this would be a good way don”t you think?The FED has already warned u.s. Banks to have their selfliquidating plan ready for 2021.I suggest you read the FED”s reports and notes.

  3. roddy6667 says:

    Sounds like a new cottage industry. Whenever governments start these massive bailout programs, you make up a fake company and submit an application for at least a million dollars. As soon as the funds arrive, transfer them to a bank in a country that does not have an extradition treaty. Rinse and repeat.

    • roddy6667 says:

      In the US, convicts have been running this scam and getting millions of dollars for non-existent companies. Some got caught.

    • fajensen says:

      Like with the Gold Rush, the real (and durable) money is in Services:

      The clever people make (up) the company beforehand, then legally sells it off to the fraudsters for a profit whenever these opportunites arise.

      In Denmark there was always a steady trade in “ready made companies” for all manner of things, even setting up a legal business and avoiding doing the paperwork for it. It’s about 1000-3000 EUR for one of those.

      I’d suspect that those of the “desk-drawer companies”, that went ‘beyound and above’ and also has a reasonable and documented turnover, are a lot more valuable now!

  4. MonkeyBusiness says:

    The program should be named FCTC i.e. From Crooks To Crooks.

    Isn’t Brexit 12 days away? The conditions are now rife for High Chancellor Sutler to seize power.

  5. Anthony A. says:

    “The European Commission is looking at ways to securitize bad loans at the EU level and offload them to global investors, as was recently done, with a certain degree of success, in crisis-hit Italy.”

    Who, in their right mind, would actually buy these packaged bad loans? Wait, didn’t the same thing happen in the U.S. about a decade ago?

  6. Mark in Mayenne says:

    My brother in law works in a jetski shop and they have run out of stock, with people coming in waving their loan money and explaining that they don’t have to pay it back because they’ll just declare bankruptcy. You can’t get a jetski in England for love nor money.

  7. Kenny Logouts says:

    And that’s the purpose of the loans.

    Voter friendly helicopter money.

    “Loans”, yeah right.

    Just keeping everyone happy for a bit longer.

    • fajensen says:

      The next UK election is in 4 years time.

      I believe its more about putting the 2’nd and 3’rd Tier Tory sponsors “In The Thing” after Tier 1 got their snouts well and proper in the trough; all those with ferry companies that doesn’t have any boats, the privatised track and trace that doesn’t, the testing that does not work and so on and so forth.

      Just one world-beating scam after another with that lot!

  8. topcat says:

    The british government is a sovereign currency issuer and can print as many pounds as it wants or needs without any problem whatsoever, excepting the lack of jetskis.

    • Wolf Richter says:


      Get a dose of reality. You’re willfully blind to existing evidence of how nutty your MMT comments are. MMT has CONSEQUENCES: Argentina, to use your words, “is a sovereign currency issuer and can print as many peso as it wants or needs without any problem whatsoever,” and it did and it’s still doing it, and the value of the peso has collapsed from 1 ARS = $1 USD in 2000 to 1 ARS = 0.7 US cents. And most of the long-term prices are now denominated in USD because it ruined its currency with MMT. That is inevitable.

      • Erle says:

        I took his comment as sarcasm. No one in their right mind believes in MMT.

      • fajensen says:

        And … Yet, in Argentina, the people deciding policies are so wealthy that they have to commute by helicopter because the length of their driveway requires spare cans of fuel!

        Conseqences there may be, but, not for anyone with any say in the matter!

    • Frederick says:

      Without any problem whatsoever I think you need to do more research

  9. Xabier says:

    Superb article, Nick, thank you.

    I think we can sum it all up as governments which thought they had merely pressed ‘Pause’ during the initial months of the crisis, will find that they had in fact pressed ‘Destruct’.

    I do hope life is looking up for you in Barcelona, too, in some or any way at least!

    At least you are near some of the most exquisite countryside in Europe. I’ve longed for some time to go for a walk around Poblet, but have to make do with the very flat land here in Eastern England, which does have it’s beauties, too.

    Aupa mutil! I don’t know the Catalan equivalent I’m afraid…..

    • Nick Corbishley says:


      Great to hear from you.

      I suppose the best Catalan translation for “aupa” would be anims, but I’m the last person you should be asking when it comes to Catalan lexicon. Speaking personally, I prefer the aural tones of “aupa”, it’s a beautiful sounding word that seems to perfectly convey its intended meaning. I suppose in the UK we’d probably use the rousing Victorian-sounding maxim “keep your chin up”, an expression I’ve never much liked.

      For the moment, the three of us — me, my wife and my mother-in-law — are hanging in there, after 210 days of living under the same roof. Next week, we’re gonna have a little day trip to the holy mountain of Montserrat to reconnect, however briefly, with Mother Nature and enjoy some of that exquisite Catalan countryside.

      Take care and stay safe.


      • Frederick says:

        210 days under the same roof as you MIL? WOW

      • Xabier says:

        Montserrat is a place replete with spiritual energy, especially with few tourists about, good choice.

        As the Guards sergeant said to Churchill, at the door of the bunker during the Blitz:

        ‘Its a great life, sir, if you don’t weaken!’

  10. Olivier says:

    @Nick What is “emerging” lending: did you mean emergency lending?

    • Nick Corbishley says:

      Ooops. Yes, it should read “emergency lending”. Thanks, Olivier, for flagging it up.

  11. Erle says:

    I asked about the free munney to augment my employees pay. It was all tied up with the big banks like Jamie Dimon’s outfit and Goldman that knew how to scam the system before it was announced.
    I kept them all employed and paid throughout. Polling them, none knew of any friend or relative that had a problem with the virus. I neglected to ask about their old relatives.

    • Erle says:

      The worthless teachers of the public schools have refused to show up in class. Then what is a parent to do? Forego work to babysit and get hostile when watching the remote “learning”?
      I asked my wife, who is a competent child teacher, if she would consider having the brats of the employees in a makeshift classroom in an underutilized ancient industrial building across the street. It has heat and light which is more than pre 1920 schoolrooms had and they did fairly well.
      It was too much to ask, I suppose.

  12. Erle says:

    Mister Corbishley, I certainly read all of your entries for content and occasional humor.
    Thanks for your efforts.

  13. Erle says:

    The pols are habitual grifters as is the norm.
    Couldn’t they hire a consultant street level grifter/con artist to advise them on the ways to do a run around on these programs?
    What the hey? The idiots that wrote this could have gotten the advice for nothing by granting freedom for the best thievery analysis by a single person of the scheme before releasing it into the wild.

  14. FatManCometh says:

    Comparing to France… Government subsidiaries dominate the economy. More than half. Are they lending to themselves?

Comments are closed.