Calls for more repayment support as figures highlight debt concerns
Business leaders have called for more support meeting government-backed loan repayments, as new figures have underlined the scale of the problem facing businesses.
Last year, record levels of smaller businesses sought external financial support, according to the British Business Bank, with nine in ten (89%) doing so because of the impact of Covid-19.
Almost half (45%) of SMEs applied for external financial support in 2020, compared to 13% in 2019, resulting in gross bank lending rising by 82% to nearly £104 billion.
Whilst the Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) enabled many businesses to raise funding and protect their cash flow, the concern is that they will create additional challenges down the line, with many needing to make repayments before they are financially ready to do so.
According to the research, 23% of businesses say they have spent all the money from their loans, and the Office of Budget Responsibility has predicted a default rate of 40.4%, with £27.2 billion of loans expected to be written off.
This is reinforced by recent warnings from the Federation of Small Businesses (FSB) that 250,000 businesses could be lost within the next 12 months alone, prompting many business leaders to call for more repayment support.
Scrap loan repayments completely
Before the Budget, hundreds of UK businesses wrote to Rishi Sunak urging him to scrap loan repayments completely.
In the open letter to the Chancellor, 388 business leaders called for “swift and decisive action” or risk a tidal wave of insolvencies and business failures.
They urged for all debt accrued through Government-backed loans to be entirely written off for SMEs, arguing this would give the 2 million plus businesses who have taken out loans since the beginning of the pandemic the best chance of survival.
It is estimated this move would cost the Treasury approximately £68bn. But the businesses argue that this is much less than the £137bn spent bailing out the banks after the financial crisis.
- Should you refinance your Bounce Back or CBILS loan?
- Ways to manage cash flow
- How to spot a cash flow shortage before it happens
Student loan style repayment scheme
Federation of Small Businesses chairman Mike Cherry has also called for more help for struggling companies.
He said: “Of the small firms that have recently accessed finance, four in ten now describe their debt as ‘unmanageable’.
“More than half of those with facilities say a student loan approach, whereby repayments are only made once a firm is profitable again, would mark a helpful way forward.
“As repayments start to fall due in the coming months, lenders should remember that these loans were only made possible by the Government in order to help firms in need, and treat borrowers accordingly.”
The Chancellor recently unveiled the “pay-as-you-grow” initiative for the Government’s CBILS and BBLS.
This offers businesses the option to extend repayment terms from six years to ten, as well as make interest-only payments or pause them entirely for six months.
However, whilst this support will provide many businesses with more time and greater flexibility to repay the loans, it might not be the best solution for all.
Some businesses could find that this just pushes the cash flow challenges further down the line, whilst others might not have access to this help at all.
The co-signatories to the ‘Fighting Back for Business’ letter to Rishi Sunak argue that this does nothing more than “delay the inevitable”, with millions of SMEs teetering on the brink of insolvency.
The government has also announced a new Recovery Loan Scheme, which launches in April, promising further loans of £25,000 to £10 million.
The government will guarantee 80% of the finance to the lender.
But unlike the previous loan schemes, interest payments and any fees will need to be paid by the business from the outset, and lending will be subject to affordability checks.
The concern is that businesses who seek further loans through this scheme will only be adding to their debt burden, pushing their cash flow challenges further down the line.
What other options are there?
Whilst the support packages mentioned above offer more time to repay loans, it certainly will not be the best solution for all.
Instead, refinancing your existing finance facilities could provide better support over the short, medium and long term, reduce the cost of borrowing and offer greater flexibility.
At times like these, businesses must assess all of the options available.
Reviewing all the options and making the choice that will give your business the most benefit over the short, medium and long-term will be vital for success.
When doing this, focus on suitability rather than convenience and cost, as the easy option isn’t always the most beneficial in the long term.
As an independent, FCA-regulated commercial finance broker we specialise in helping businesses find the right funding solution, and at a time when many people are confused and nervous about the future, our services could be the support you’re looking for.
To speak to our expert team, call 0800 9774833 or request a call back at a convenient time.
Remember, having discussions as early as possible with the appropriate financial services will give you the best chance of securing the support you need.
What do you think? Is there enough repayment support available for businesses? Let us know your thoughts in the comments below.