Defaults on Covid Business Loans Expected to Cost Taxpayers Tens of Billions

UK taxpayers are expected to be required to pay tens of billions of pounds as two in three small businesses expect to default on government-backed Covid support loans.

A survey of more than 1,000 small and medium-sized enterprises (SMEs) by Nucleus Commercial Finance found that two-thirds (66%) of SMEs that have received Covid loans believe they are unlikely to be in able to repay them. This equates to 2.3 million businesses that plan to never repay their Covid loans.

Banks have lent nearly £ 50 billion in ‘rebound’ loans since the pandemic began in March of last year.

Under the loan scheme, which the government rushed in last year to support hundreds of thousands of small businesses during shutdowns, banks could offer state-guaranteed loans of up to £ 50,000. This means that the taxpayer is left to cover the losses.

The survey also found that the expected default rate among the UK’s smallest businesses – those with between 10 and 50 employees – was even higher, at 75%.

The number of early-payment defaults by SMEs is significantly higher than predicted by the Office for Budget Responsibility (OBR), which suggests that up to 40 percent of borrowers could default.

The OBR estimates that defaults on rebound loans could cost the taxpayer up to £ 19 billion. However, if up to two-thirds of businesses fail to repay their loans, that number could climb much higher.

Chirag Shah, Managing Director of Nucleus Commercial Finance, said: “Government lending has been a vital lifeline in times of crisis, helping SMEs survive and begin to recover from the impact of the pandemic. However, based on this idea, the government will face challenges if defaults reach expected levels and companies will need additional funding to help them cope.

“Rather than leaving the small and medium-sized businesses that support our economy on the verge of survival, government and industry need to engage with them now to provide them with ongoing support and point them to available solutions. It is crucial that government and industry work together to support SMEs over time as they shift their funding from these loans to other sources of funding.

Among SMEs that received a loan, almost two-thirds (64%) have started repaying, while more than a third (34%) have yet to start repaying. That’s 17 percent who took a repayment vacation, 9 percent who defaulted on the loan before starting repayments, and 8 percent who have yet to start repaying.

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