Could Invoice Finance Have Avoided £4.9 Billion of COVID Fraud?

The arrival of the COVID-19 pandemic completely upended British business, lending, and finance in 2020. While most used the temporary government support schemes responsibly and professionally, a criminal element of COVID fraudsters also took advantage. Lax security measures around business loans allowed them to defraud the state out of billions of pounds. Here's how it happened - and how invoice financing could have stopped it.

What Was The "Bounce Back Better" Loan Scheme (BBLs)?

"Bounce Back" Loans (or BBLs) were emergency business funding made available due to the COVID-19 pandemic. Many struggling businesses suffered from the lockdowns, disruption, and losses due to the pandemic. Chaos resulted in an unprecedented -9.9% recession nationally and a drastic drop in consumer confidence. As a form of quantitative easing (QE), the BBLS sought to limit COVID's deeper, permanent economic damage to the British economy.

They were offered to struggling British businesses in 2020 by Chancellor Rishi Sunak. Parliament passed an emergency budget addendum in the Summer Economic update. The one-off scheme was closed less than 12 months after it was announced. In that short time, it’s estimated that £4.9 billion of public funds were lost to fraudsters.

What Did BBLs Offer?

Successful applicants received a government-backed, six-year loan of £2000 - £50,000 at a fairly generous 2.5% APR. The loans also offered a complete payment holiday of one year and, unusually, a 100% guarantee on brokered cash if repayment proved impossible. Ambiguity led to considerable public confusion over whether BBLs were 'true' bank loans or a means-tested grant.

Any UK SME that became a 'business in difficulty' in 2020 could apply. These businesses were fairly judged to be at risk of suffering a loss totalling over half of the SME's available capital. Over £47 Billion in funding was eventually awarded. Most BBLs went to businesses with an annual turnover of under £700,000.

What Went Wrong?

On the 3rd December 2021, the National Audits Office (NAO) published its second report on the long-term impact of the BBLS. While the NAO's update noted that around 63% of BBLs are now being repaid, it also contained quite a few unpleasant surprises. The NAO thinks that at least 11% of the 1.5 million BBLs brokered were claimed by fraudsters, often awarded to shell companies with no trading history, purpose, or verifiable address. The NAO also estimates that a staggering £4.9B in public funding was stolen and misused. Complicating matters further, thousands of 'semi-fraudulent' BBL applicants misrepresented their SME's turnover, value, COVID losses, and staff payroll to get better terms.

What Could Have Prevented Disaster?

The main issue cited by NAO as to why it's hard to recover fraudulent BBLs was a consistent lack of solid written evidence. With few or no third-party logs, assessments, and checks to verify the use and movement of BBL funds, detectives could only rely on circumstantial evidence and tip-offs.

The easiest way to provide the in-depth oversight and documentation needed without introducing bulky new schemes or legislation would have been to make periodic invoice outsourcing mandatory for BBLs. Invoice finance was still fully available throughout the pandemic and would have been straightforward for the government to access and fund.

Along with the added benefits of invoice financing improving company’s day-to-day cash flow or access to a skilled credit control team, It can secure, track, and insure your outsourced invoices. Our risk and relationship management teams check if payment and trading information syncs up, often catching any threats to your business. Optimum also run regular audits for fraud and late repayments, vastly reducing the time it takes to complete credit security 'sweeps'. Explicit terms and good customer support help to reduce the risks of 'naive' fraud.

On top of this additional paper trail, Invoices can be fully insured against loss, ensuring that you are still fully paid even if your customers go into liquidation and the funds prove unrecoverable. This bad debt protection would have made the 100% government backing for BBLs completely unnecessary. If SME’s had been using invoice finance rather than government backs loans, not only would the set-up have been considerably quicker than the BBL application, they could’ve also received higher funding limits and quicker payments on their invoices.

How Can Invoice Finance Help SMEs?

Most BBLs went to businesses with an annual turnover of under £700,000, an amount perfect for invoice financing. Invoice financing refers to a credit service that speeds up payment on invoices. There are two main types available to businesses.

Invoice Factoring. Your third-party financier will provide funds against your unpaid invoices and handle every aspect of their collection including payment reminders, monthly checks, and customer verification.

Invoice Discounting. Your third-party financier will provide funds against outstanding invoices. Your company is then responsible for managing customer finances and ensuring a timely repayment.

Applying the invoice financing framework and checks to the existing BBL scheme could have reduced the large amount of fraud that we’ve seen. Invoice financing could have also sped up the recovery process for valuable public funds while protecting BBL lenders across the board against defaults and fraud. Invoice finance is a brilliant and yet often overlooked source of funding for businesses. We’d like to see more businesses taking advantage of this in the future and avoiding the potential pitfalls of other types of business funding.

At Optimum Finance, we utilise innovative technology to offer a range of flexible funding solutions, which grow alongside your business. Get an instant estimate for the amount of funding you could access with our finance calculator. Products include invoice discounting and factoring that can boost your cashflow and give you access to a dedicated credit control team.

Email or call us to speak to our experienced team of experts and find out how invoice finance could help your business. We pride ourselves on getting things done quickly and providing access to cash within 24 hours of approval. We are passionate about finding solutions and delivering to clients’ needs.