Initial data from officials suggest that the actual figure for defaults on government-backed emergency loans is much lower than the previously estimated figure of £5bn.
The £47.4bn bounce back scheme supported small and medium-sized (SME) businesses. Official figures from early debt servicing show that only five to ten percent of these businesses have missed repayments which is much lower than expected.
It seems that there has been a better than expected recovery in the economy with many businesses getting back to some form of normality and recovering their financial position. The end of lockdown restrictions has seen a boost to the economy and many businesses are reaping the benefits. In fact, up to five percent of bounce-back loans were paid back in full when the interest-free period ended.
There has even been some suggestion that many loans were not taken out of necessity but more as a precaution in the wake of an uncertain future. This appears to be a credible reason for fewer defaults as many businesses were not in financial trouble when they secured their loan and have, in fact, ridden the wave of the lockdowns with furlough paying a large percentage of staff costs.
What is the Government Saying?
The treasury initially estimated that between 35 and 60 percent of bounce back loans would remain unpaid, and this led to an estimate of a cost to the taxpayer of up to £19bn. With so much uncertainty during the pandemic, this was perhaps a cautionary estimate.
With the taxpayer in effect guaranteeing the loans of up to £50000 each it was a potentially costly risk, driven by an urgent need to help a huge number of smaller businesses from collapsing. The expected cost of defaulted loans secured by the government was predicted to make a huge dent in the treasury’s finances. The lower actual defaults figure is a welcome update for once.
Whilst this seems like good news it may not give the whole picture. There has been some speculation that the six-month repayment holidays and extended loan terms may have simply delayed the worst of the problems.
Although the default rate is less than previously thought it cannot be denied that many of the loans may have been obtained fraudulently. Many have not been used to prop up failing businesses but have instead been seen as an easy way to obtain a loan for other purposes. Banks urgently need to take an early look at defaults over the coming weeks as the 90 day repayment period begins.
Banks have the added pressure of being unable to recover the debt in their usual way. There is a government-led expectation that banks will make every attempt to work with customers who default on their loans, and they have been asked to come up with creative solutions to help borrowers.
The government is obviously keen to avoid the triggering of the state-backed guarantees but with the quick turnaround application process, there is likely to be some fallout where businesses secured their loans quickly without the usual diligence in place.
This desire to get money to businesses speedily as they were in crisis was expected to lead to more defaults than usual.
What Does This Mean for the Economy?
What is yet to be determined is how successful the bounce-back loans were in helping SME businesses to survive and prosper. It could be argued that putting money out into the economy, even if it was not spent directly on the business as intended, will have had a beneficial effect on financial growth due to increased spending.
On the other hand, it can be argued that whilst defaults are lower, the total amount of business debt burden is higher than ever leaving those weaker companies vulnerable. It will be a game of wait and see to find out which companies have been able to adapt to this new world and who can survive financially and come out strong.
Providing the defaults remain lower than expected, there will be good news for the treasury and the taxpayer, but the story is not yet over. So many businesses and sectors will require ongoing support if they are to recover and grow.
Self-employed individuals not operating via an LTD company have been able to benefit from grants via local councils. However, if the self-employed individual had become self-employed within only 12 months of these schemes being introduced it made it extremely difficult to obtain financing.
Loan matching services like Now Loan helped thousands of people during this period find affordable personal credit to help sustain their business regardless of good or bad credit histories.
The government has received a lot of criticisms of how they handled claims by self-employed people and should consider new strategies to help SE individuals sustain and maintain their businesses should there be another lockdown.