Bounce Back Loans: Some Insights
The Bounce Back Loans Scheme was a powerful economic tool designed to save thousands of small businesses from failing during the pandemic. During the lockdowns, there was a real danger that many SMEs would fail. The Government had to act fast and it introduced the Bounce Back Loan Scheme. The Scheme targeted the smallest businesses and sought to provide quick access to loans of up to £50,000, or a maximum of 25% of annual turnover, to maintain their financial health during the pandemic.
Bounce Back Loans paid out by accredited lenders were 100% guaranteed by the government and were available to businesses that existed before the pandemic. The Scheme undoubtedly saved a lot of businesses that would otherwise have failed at a significant cost to the UK economy.
The British Business Bank has published data on the Bounce Back Loan Scheme and the level of defaults. We look at Tide data to provide some insights.
Tide only made c.1,800 loans out of a total of 1.5m Bounce Back Loans
At Tide, we participated in the scheme as many members asked us for help, and we wanted to support the Government’s efforts to help the economy. However, we could not provide Bounce Back Loans at scale. This was because the British Business Bank only provided a guarantee, not the funding for loans. Unlike the high street banks, as a digital lender, Tide did not have access to the funding provided by the Bank of England and had to raise the money from third parties. At the time, we tried to get the Government to change the rules so we could get the funding directly from the Bank of England. While there was a lot of support in principle, in the end, the rules did not change, and, unfortunately, we had to stop offering Bounce Back Loans.
To make the funding available to as many businesses as possible, the Government decided that there should be no credit risk assessment.
The Government set the terms of who the money could be lent to. It decided that there should be no credit risk assessment to make the funding available to as many businesses as possible. In return, the Government covered lenders against the losses through a 100% guarantee. As a lender, we were NOT allowed to select or prioritise businesses based on the ability to repay. Lenders were required to check eligibility, e.g. that the business existed before the pandemic, that it was not in one of the few excluded categories. Eligible companies were also subject to standard customer fraud, Anti-Money Laundering (AML) and Know Your Customer (KYC) checks.
At Tide, we conducted all the necessary and permitted eligibility verification checks (e.g. at the time we lent, lenders were not allowed to check self-certified turnover under the Scheme rules to ensure quick pay out). We were so concerned about acting in the taxpayers’ best interest that we had our internal Quality Control team double check that EVERY single loan paid out met the Government’s eligibility criteria and all permitted verification checks had been completed. All did.
Business Failure (rather than fraud) is the main reason for defaults
We all know that entrepreneurship is hard. Even in the best of times unfortunately, not every business idea works out. Government statistics show that the business death rate is around one in ten per year. For businesses in their first few years of operation, the rate is even higher at around c.15% per annum. Tide serves a high number of this cohort. The lockdowns were likely to generate an even higher rate of business failure (even with support).
Looking at Tide’s experience to date, 26% of loans by number (31 March 2022) have defaulted. As we stopped lending around two years ago, the default rate at Tide so far is broadly consistent with the natural pattern for earlier-stage businesses. This compares to the Public Accounts Committee, which in April 2022, quoted an estimate of 36% (which includes 10% it attributes to fraud). The higher rate also reflects the lack of credit risk assessments. Some businesses that were already struggling would have got loans under the Scheme.
There has been much speculation about fraud. Looking at Tide, identified fraud at Tide stands at 0.6% (11) by number of loans (31 March 2022). While small, we are not complacent. All fraud has been reported to the National Crime Agency, which coordinates fraud investigations for the Police. None of the fraud cases could have been prevented at the time of application. At Tide we have zero tolerance for financial crime and always support all pursuits by the authorities of those that perpetrate fraud.
Digital lenders appear to have higher loss rates, but that is because they have submitted claims to the British Business Bank more quickly.
At Tide, we are committed to acting in the public interest. If a loan has defaulted, we will work to recover what can be recovered. Under the rules of the BBL scheme, we and other lenders have up to 12 months after the final notice has been served to submit a claim to the British Business Bank to recover the loss under the terms of the guarantee.
Tide and other digital lenders have the highest claims to date because we tend to be faster in our collection processes compared to traditional banks which have huge loan portfolios and are working with legacy systems. Tide submits its claims typically within 90 days after final notice to the British Business Bank. We will continue where appropriate to recover the money after we have submitted a claim to the British Business Bank, and return the money.
The Big Banks have submitted few, if any, claims, which is not likely to be a good indicator of the state of their Bounce Back Loan portfolios, as the most probable answer is that they are just likely to have not processed their claims. The British Business Bank points this out in its comments on the statistics.
Digital lenders may still have a higher Bounce Back Loan default rate than the traditional banks. For the most part, this will be explained by digital lenders serving younger businesses with a naturally higher failure rate.
Ultimately, it will be a few years before a final assessment can be made on the scheme.