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

The Daily Telegraph - Business - - Business Comment - ADRIAN MON­TAGUE Sir Adrian Mon­tague is chair­man of TheCi­tyUK Lead­er­ship Coun­cil

‘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

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