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    Is it a risky move to make the Covid business loan scheme permanent?

    Is it a risky move to make the Covid business loan scheme permanent?
    [Photo: Bloomberg]
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    The Bounce Back Loan Scheme saw more than £44 billion worth of loans distributed to 1.1 million small businesses and individuals to help struggling UK businesses cope with the financial challenges of the pandemic.

    The UK government partnered with high street and participating banks to distribute the loans, offering 100 per cent guarantees on the payment of this scheme, allowing borrowers to apply for up to £50,000 with very light checks and often lightning funds available on the same day.

    However, with incredibly favourable rates, including no interest in the first year, it has emerged two years later that a large sum of the money borrowed was lost to fraudsters. In fact, data shows that 10 per cent of all loans taken out were some kind of fraud, amounting to £4.9 billion. The fraud was manifested by firms overstating their revenue and income or those deciding to close down their company once funding had been administered.

    Despite huge fraud, the UK government has been in talks this month to make the Covid business loan scheme permanent – but is this risky?

    Is the Covid business scheme a laughing stock?

    ‘The terms of the Bounce Bank Scheme were so favourable that anyone with a business was inclined to take it,’ explains Richard Allan of funding platform Capital Bean. ‘Regardless of whether they actually needed it or not to help finance their business, you only needed two years of account and a little bit of turnover and you could get £50,000 in a flash.’

    ‘Stories quickly emerged of people using the money to renovate their kitchens or buy new cars – and who knows if people were ever going to pay them back or just close down their companies.’

    What impact do these losses have on the economy?

    ‘Losing almost £5 billion must surely have an impact on the economy,’ argues Benjamin Sweiry, economics graduate and founder of finance startup Dime Alley.

    ‘Other data shows that 60 per cent of the loans taken out will not even be repaid and this does not add up. We have low interest loans and only a small portion of people paying them back, so this scheme is not vaguely going to break even.

    ‘With inflation rates at 7 per cent and dramatically increased living costs, is handing out low interest money going to lead to another economic crisis?’

    Maybe tougher checks are needed this time around

    One could argue that the role of the Bounce Bank Loan Scheme is to help those who truly need it. But if the government is looking to extend the scheme, this time round should be a less automated loan process. Instead, it could involve some manual underwriting of each applicant, such as calling up each borrower, requesting proof of documents and taking a more critical view – and this could minimise fraud and bad debt rates.

    In addition, there is a conversation about partnering with more commercial lenders, who until this point just watched the government hand out loans when they could have been charging better interest rates and growing their lending businesses.

    Justine Gray of US-based finance startup, Dollar Hand, explains: ‘Making a comparison with the US, the stimulus checks system definitely had its flaws, but it was very strict with its eligibility.

    ‘Of course, some people received cheques even though they were financially fine, but it was harder to get these cheques and that minimised fraud internally. There was fraud externally from opportunitistics trying to mis-sell stimulus checks and charge fees – but these kinds of offers are always going to attract foul play.’