Our plan to boost firms that can’t repay Covid loans
A third of the two million SMEs that took loans will be held back, even sunk, by the weight of repayments
‘Businesses burdened by debt are more precarious and less able to invest and grow’
The Covid-19 pandemic has provoked fierce debate. To lockdown or not to lockdown, face masks or no face masks, pursue herd immunity or suppress the virus.
In the UK, there can be no qualms with the Government’s simple and emphatic mantra that we must build back better. But if the past is a guide to the future, rather than expecting the economy to experience a W, V or L shaped recovery, we should probably bet on it being lopsided.
Ever since the Great Depression, when many northern shipyards and textile mills remained shuttered as London and the South East recovered with new industries like consumer electrics and chemicals, each downturn and subsequent recovery has deepened the regional divide.
This time, there is an even greater potential burden. To weather the economic storm, many companies have drawn upon the emergency loans that the Chancellor and industry rapidly put in place. This initiative has rightly won widespread approval.
But as the clouds begin to clear, many SMEs will find that they will be held back, perhaps even sunk, by the sheer weight of repayments.
Recapitalising these firms will be vital to Britain’s ability to recover quickly from the crisis. And it is a challenge made all the more urgent as the furlough scheme and other government support begins to draw to an end.
Over the past few months, TheCityUK has convened more than 200 experienced practitioners from across 50 UK-based financial and related professional services firms to grapple with this problem. This week, we have issued our report setting out our proposed way ahead.
By the end of March 2021, we estimate there could be more than £100bn of unsustainable debt held by British companies. This does not include deferred VAT payments. By that time around two million SMEs will have taken a government-backed loan, with projections suggesting that around a third of those may end up struggling to repay that debt. And, with three quarters of those businesses currently based outside London, this is a truly national concern.
The potential impact is sobering. Businesses burdened by debt are more precarious and less able to invest and grow, which will ultimately slow our national recovery. SMEs are the backbone of the economy and in the worst outcome, there could be three million jobs at risk – equivalent to every single job in the West Midlands.
The innovative proposals we have developed have been done in consultation with HM Treasury, the Bank of England, the Financial Conduct Authority and business trade associations representing a wide spectrum of business sectors and sizes. They are designed to help firms convert, restructure and repay these debts.
First and foremost, viable but highly indebted SMEs across the UK must have an option to reduce their overall debt burden by converting their government-backed loans into a more manageable form.
Doing so would help free up cash flow for investment, and, as we set out in our report, if this investment takes the form of preferred share capital or subordinated debt, business owners will avoid the need to issue ordinary equity, and therefore need not be concerned about losing control of the enterprise they have worked hard to build.
Creating a government-backed UK Recovery Corporation to manage these holdings would help prevent moral hazard and maintain a healthy distance between private enterprise and the state. And while the Government would initially be the principal investor, by inviting private investment into the Corporation over time, this could create an ongoing financing channel for SMEs across the UK.
Clearly, this option would not be suitable for the smallest businesses that have benefited from the Bounce Back Loan Scheme or the small Coronavirus Business Interruption Loan scheme. But they too will need support.
So, for those that have received loans of up to £250,000 we suggest using the tax system to means test and collect repayments – perhaps using taxable profits as a measure of affordability. That way not only will small business owners benefit from reduced financial strain; they will also be spared administrative burden, allowing them to spend their time doing what they do best. In simple terms, it would act a little like a student loan for businesses.
And finally, amid the current challenges we must not forget that the future always holds great opportunity. No doubt many of our great and enterprising SME business owners are already eyeing their next move.
Let’s help make sure they have the funding they need by creating Growth Shares for Business. Backed by a Growth Capital Fund, this would support viable SMEs that do not have a problem with their current debt pile but still need financing to grow.
Taking it a step further, these Growth Shares for Business could be targeted to support the regeneration of our regional economies.
The window of opportunity to prevent unsustainable debt sinking otherwise viable businesses is small and shrinking fast. Failure to act quickly and decisively will condemn many companies to avoidable failure.
Our industry stands ready to play its part by working in partnership with the authorities to help these companies recover and, in so doing, to get Britain back on its feet.
Building British business: the Government needs to help recapitalise firms and stimulate the UK’s recovery