Small business owners do not believe they will be taken to court for failure to pay, or they fear they will have gone bust within a year.

A shocking 43% of small businesses which have taken out Bounce Back Loans, or Coronavirus Business Interruption Loans do not believe that they will be able to make the repayments, or that the government will chase the debt if they default on repayments, according to the Business Banking Resolution Service (BBRS).

The Bounce Back Loan Scheme (BBLS) offers small business up to £50,000 interest free for the first 12 months, with a interest rate of 2.5% thereafter.

The Coronavirus Business Interruption Loan Scheme (CBILS) supports larger businesses with loans of up to £5 million, with variable interest rates.

Between the two scheme, over £22 billion has been handed out to businesses, of which over £14 billion was in BBLS.

In the months and years ahead, a key element of the BBLS is what could be the downfall of the scheme. The scheme was designed so that the lenders “will not assess affordability” and as a result, will have a much faster turnaround than its counterpart CBILS, providing cash strapped businesses with much needed relief.

However, this system is at high risk of being abused. Its highly likely the BBL are being awarded to applicants who are already heavily in debt, on the verge of bankruptcy, or failing to service current debts. This won’t pose an immediate problem, however once the repayments start, businesses without the correct planning and support in place will be defaulting on repayments. 

This raises the prospect of thousands of firms having to be pursued through the courts for what they owe – with many more going bust despite the Treasury’s generosity. A total of 27 per cent of respondents to the BBRS survey said they do not believe they will be chased for the debt, and 16 per cent warned they will not be financially strong enough to repay it in any case.

Furthermore, the banks and treasury are likely to carry out their own investigations to ensure there was no misuse of the loans. Sole traders and business directors could find themselves in a whirlwind of investigations. Sole traders could face bankruptcy, left on their credit file for years. Directors could be disqualified from holding office for “unfit conduct”

This will inevitably lead to borrowers arguing that they were inappropriately lent to, with lenders responding they were not instructed to check affordability.

Lewis Shand Smith, chairman of the BBRS, said: “Government-backed loan schemes have provided a lifeline. But it is critical for customers to understand that, just like any other loan, they will be required to repay 100 per cent of the money they borrow under these new schemes. There needs to be clarity about that now to avoid the risk of storing up problems for the future.”

Stephen Jones, chief executive of bank lobby group UK Finance, told the Telegraph he fears many firms are already treating the state-backed loans as grants which will never need to be repaid.

With this in mind, the question now which remains to be answered, is how will the government look to resolve this?

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