Is the post Covid Debt burden putting the recovery at risk?

It was recently reported that the Federation of Small Business (FSB) has warned the Government in a new Policy Paper, that a surge in new borrowing created to offset Covid 19 financial impacts, are taking many Companies into “unmanageable debt levels”.

Even before the latest Lockdown announced in January 2021, the FSB was calling for urgent action to protect otherwise viable Businesses from being undermined.

Immediate support measures proposed included an extension of the VAT Payments deferral and also to defer repayments due under the Bounce Back Loan scheme, until March 2022.  

In addition more radical proposals were suggested that could help more Companies into “Employee ownership”.

The typical process to achieve a change in Company ownership to Staff ownership is by selling to a Trust.    In this case it is proposed that the debt, created via the Government support schemes, could be used to finance the purchase of shares, then paid off with future profits.

The FSB suggested that the route to achieve this would mean that the emergency debt could be assigned to an Employee ownership trust in return for the trust getting preference shares in the Business of the same value, plus an option to acquire, say, 10% of the Business when there is any future change of control.   

This could move the debt from Creditors and into Capital on the Company’s balance sheet, which could be hugely important if further support was needed to take the business forward.

The FSB stated that around £63 Billion was lent to small and medium sized companies via the 2 state backed Covid 19 lending schemes between May and December 2020, as against £57 Billion in lending in the whole of 2019.

As a result of this increase in debt, the FSB stated that the proportion of small companies carrying some form of debt had risen from just over 50% to more than 75% as a direct result of the Covid 19 pandemic, with the share of borrowers describing their debt as “unmanageable” rising from 1 in 8 (12.5%) to 2 in 5 (40%).

In addition, 50% of Companies carrying the new Covid commercial debt also have owners using Personal Finance such as credit cards, overdrafts or loans to support those commercial loans.

The FSB stated that many companies were entering 2021 under “enormous financial pressure due to a perfect storm of factors including poor Christmas trading, 

With repayments on Bounce Back Loan scheme due to begin in Spring 2021 and the repayments on CBIL’s to be increased with interest added, FSB said that creativity and flexibility would be needed to avoid turning the rescue programmes into a debt crisis that then prevents Companies from recovering, hiring and investing.

An alternative proposal was the mass conversion of the outstanding debt to a tax liability to be paid off over a longer period from profits - this would require the Government to “step in and nationalise a portion of small business debt”, perhaps through the creation of a “bad bank”.

Bloom’s comments on the FSB’s Policy Paper

Bloom considers that this Policy paper covers some very important issues, created very much by the continuing impacts of the Pandemic.  

The obvious benefits to Businesses for the VAT Payment deferral and delays in starting repayments on the Bounce Back Loans would be positive cashflow.

However until full trading conditions can return, there are huge risks to existing Employment even with Furlough and even more importantly the opportunities for any new employment will likely be greatly effected, without flexibility and new thinking.    This will then impact on the principles of “levelling up” and “Bounce back Better”.