More than £20bn ($25bn) of 100% state-backed loans have been handed to UK small businesses, despite fears that as many as half of the loans may eventually go bad.
The Treasury said on Tuesday that £21.3bn had now been lent by banks under its Bounce Back loans scheme.
The figure means the programme is by far the most popular form of coronavirus support loan offered by the state to small and medium-sized businesses. Bounce Back borrowers have borrowed more than double the total lent under the government’s two other support programmes combined.
Bounce Back loans were launched last month in response to criticism of the slow speed of the government’s coronavirus business interruption loans (CBILs). CBILs were only 80% backed by the state, meaning banks were still required to carry out lengthy due diligence processes.
The 100% state guarantee allows banks to do “light touch” lending, requiring only basic money laundering and fraud checks before handing out cash.
However, fears are growing that this “light touch” approach could lead to a large number of borrowers eventually defaulting on these loans. Executives polled by the Financial Times this week said they estimate between 40% and 50% of loans will go bad.
Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said in a note sent to clients on Tuesday that the “deluge of cash should keep a lid on corporate insolvencies in the near-term, though with consumer demand set to remain weak in many sectors for a lengthy period, a spike in business failures in the autumn still seems likely.”
A surge in defaults would leave the taxpayer facing billions of pounds in losses due to the 100% state guarantee.
Stephen Jones, head of banking industry lobby UK Finance, said: “It’s important to remember that any lending provided under government-backed schemes is a debt not a grant, and so firms should carefully consider their ability to repay before applying.”
Almost 700,000 businesses have so far been granted Bounce Back loans, while more than 870,000 businesses have applied. Under the scheme, companies can borrow up to £50,000 on a six-year term at a rate of 2.5%.
Treasury figures released on Tuesday show over 45,000 businesses have borrowed £8.9bn under the coronavirus business interruption loan scheme. 191 companies have borrowed £1.1bn under the coronavirus large business interruption loan scheme.
And 464 tech businesses have applied for support from the government’s Future Fund. Approval and investment figures were not provided.