In response to the covid pandemic, the UK government launched the Bounce Back loan program in May 2020 to provide a cash injection to protect SMEs and other small business owners.
With the pandemic creating enormous levels of uncertainty and financial implications, the Bounce Back loan scheme offered very favorable terms for loans ranging from £ 2,000 to £ 50,000 with zero percent interest in the first year and 2.5 per cent rates fixed for up to six years.
A total of 55% of UK SMEs accepted the loan, for a total of 1.6 million businesses and a total of £ 88 billion loaned in total through a number of banks and lenders participants.
However, 18 months later and the interest period ended, UK banks start collecting the repayments. But with a significant number of borrowers unable to repay their loans, it has raised questions about the eligibility process and the impact it will have on the UK economy.
SMEs struggle to repay
“Despite very favorable loan terms, there are a large number of businesses that cannot repay,” says Dan Kettle of Octagonal capital, reflecting data which shows that 83 percent of borrowers had requested an extension of payment.
“Getting a personal or business loan that is fully unsecured and interest free for the first year is quite remarkable – plus you only pay 2.5% after that, regardless of your credit score. These are amazingly good terms and no surprise many people who didn’t even need the Bounce Back loan took one anyway.
“In theory, it really should have helped fledgling businesses that have been affected by Covid-19, including the food, transportation, travel, events and hospitality industries. “
“But with much relaxed covid restrictions over the past six months, it’s surprising how many people are asking for payment holidays or struggling to repay, with recent default figures of £ 5bn per month . “
With bounce back loans offering competitive rates and high approval, many opportunists decided to take the loan, but used the funds for their own personal virtues, according to David Green, brand manager at Fund yourself.
“The program to help businesses weather the pandemic was clearly needed and has helped so many businesses in the UK keep going. However, the stories I have heard of companies or individuals using the money for the wrong reasons have been somewhat shocking, with some seeing them as grants rather than loans and will have a hard time repaying.
“My intimate feeling is that a large majority of BBL will not be reimbursed, either simply for lack of funds or because they are no longer in activity, despite the aid and this will surely have an impact on the economy,” but how much still to be seen.
Alfie Usher, founder of Comparison of forces, agrees: “With your average financial product such as a personal loan or a business loan, very strict controls are in place and for businesses you need to demonstrate affordability and strong plans for growth. “
“This was not the case with Bounce Back loans. Even businesses that were really in trouble or on the verge of insolvent were able to borrow £ 50,000 – and someone has to pay that debt eventually, be it the government or the taxpayer. “
The impact on the economy
One cannot help but consider the impact such arrears will have on the UK economy, particularly with defaults expected to exceed more than £ 21bn.
“The economy will certainly suffer,” says Rick Dent of Finger funding. “We could see high inflation, high taxes or drastic changes in future borrowing as the banks only get more restrictive.”
However, one can also discuss the positive side of things and how many companies are going to benefit from the initial cash injection, which could have been absolutely vital for a company and its employees. Yes, there could be victims, but without the Bounce Back loan, could the losses have been much worse? ”