Businesses are either in arrears or have defaulted on £8.4 billion of Government-backed Covid loans according to new figures released on Monday.
By July the Government had paid out £1.2 billion to banks for loans that were not being repaid by small businesses.
It has more than tripled from the £350 million that the Treasury had been forced to cover under the Bounce Back Loan Scheme in March.
The banks are also asking the Government to pay them for another £2.6 billion in loans, up 63% since March.
It said that a further £1.4 billion worth of loan takers have defaulted on their repayments, down 26%. Many of those who had defaulted in March were likely among those who banks are now asking for payment for.
Meanwhile, businesses that borrowed a combined £3.2 billion had entered arrears, the department revealed, the same amount as three months earlier.
The news comes close to two and a half years since the launch of the Bounce Back Loan Scheme during the start of the pandemic.
It was launched to funnel money to small businesses up and down the UK that had been forced to stop running due to lockdowns.
Billions flew out the doors in the first days of the scheme, and by the end £46.6 billion had been lent. Companies could take up to £50,000 in a loan, or 25% of their turnover.
But the scheme also raised concerns over fraud. Checks on the businesses that took out a bounce back loan were minimal by necessity – the money had to get to companies as soon as possible.
Banks were told that if they could not get the money back from the companies, the Government would step in to cover the lost cash.
But fraud was also rife in the scheme. Lenders say they prevented £2.2 billion worth of loans going out to fraudsters but they suspect that £1.1 billion of loans still went to fraudsters.
“It is unfortunate that some have taken the decision to take advantage of this vital intervention by defrauding the scheme for their own financial gain,” the department said.
“The government has always been clear that anyone who sought to do so is at risk of prosecution.”