The risk of fraud in the Covid loan system is lower than expected

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The Bounce Back Loan Scheme (BBLS) fraud, in which companies solicit multiple government-guaranteed loans to bypass loan limits, appears to be much smaller than expected, data provider Equifax said.

Early National Audit Office estimates suggested the system could lose 15-80% due to fraud and credit risk, but the latest analysis suggests that only 0.3% of companies using the system have taken out total loans. above the £ 50,000 cap and just 0.4 percent secure installations from multiple vendors.

The scheme, which closed at the end of March, was designed to help small and medium-sized businesses borrow between £ 2,000 and up to 25% of their turnover up to the maximum value of £ 50,000.

The government guaranteed 100% of the loan with no fees or interest payable for the first 12 months. After 12 months, the interest rate will be 2.5 per annum per annum.

Andrew Fielder, commercial lending expert at Equifax UK, said: “Despite some speculation about the UK government’s misuse of BBLS, a peek under the cover shows that fraud levels are likely to be significantly lower. to what we feared.

“It is clear that the amount of fraud is too high, and the extent of the losses will not be known until borrowers start repaying in early May, but the data suggests that lenders’ checks have halted the loss. most egregious cases at the door. ”

Meanwhile, 12% of businesses with a bounce loan consistently spend more money than they generate each month, according to Equifax analysis.

The majority continue to dive in and out of the red month-to-month, suggesting that the program is successful in keeping viable businesses in existence throughout the foreclosure.

However, only 2 percent of businesses were consistently in positive financial territory over a six-month period.

Highlighting the volatile and precarious financial situation that large sections of the market continue to face, only 24% achieved positive free cash flow over four months or more, leaving three-quarters of companies unable to maintain them for most of the period. period.

Fielder said: “It is extremely encouraging to see that the program is working as intended, helping otherwise viable businesses hit hard by Covid-19 restrictions to stay afloat.

“The outlook for many companies is still deeply uncertain. There are rough waters to move forward as the economy emerges from foreclosure restrictions, and big data insights will continue to prove vital in shedding light on the health of the evolving corporate credit market. . ”

In January, three men working for a London bank were arrested in an investigation into fraudulent bounce loan applications totaling £ 6million. It is believed that the fraudulent claims were made with false data and documents.

In another case, two people who fraudulently claimed £ 489,000 under the scheme were sentenced to jail in March, after obtaining the identities of eight innocent people.

Tom Higgins is a freelance journalist for FTAdviser

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