With business borrowing up over 500%, is extending loan schemes the right move?

On Monday the Treasury announced that it would be extending its emergency business loan schemes to enable SMEs to ‘top up’ their borrowing, in an effort to help companies survive the new English (and perhaps soon UK-wide) COVID lockdown.

As per the new amendments announced by the Chancellor, businesses will have until the end of January to apply for loan schemes, including bounce back loans (BBLS) and the COVID business interruption loans (CBILS and CLBILS). These two month extensions knock the date back from the end of November and also apply to the start-up-oriented Future Fund. On Twitter, Rishi Sunak stated:

The top up will mean that businesses who have already claimed some of the low-interest loans will be able to borrow more money, and is designed to help firms who previously borrowed less than the maximum sum – up to 25% of their turnover up to the £50,000 cap – to avoid adding to their debt.

Thus far, the bounce back loan scheme has allocated £40.2 billion to 1.3 million UK businesses, with new research from EY ITEM Club highlighting that business borrowing in 2020 will be more than five times the level of the previous year.

This underlines the first problem, which, according to Conister Director, Douglas Grant, is that: “The latest lockdown measures in England will sadly be the last nail in the coffin for many companies which simply cannot receive capital quickly enough. We are therefore determined and absolutely focussed on protecting those robust businesses operating in sectors that are resilient and ultimately will grow stronger with the necessary capital in the long term.”

“Conister received an initial allocation limit of £10m for the BBLS scheme and so far, we have received 4,607 applications with a total amount of £162,739,000. Without doubt, the scale of applications is enormous and while SMEs are the lifeblood of the economy and where innovation and creativity happens, it is crucial that priority is given to resilient businesses to allow them to pivot their business models for the new normal.”

So, in the view of Conister, the key issue is that loans need to be focused on the most viable businesses. The issue many would take with that approach is politically intuitive: support loans can’t be viewed as a hand-out, they’re a pre-requisite for lockdown. As we saw in Northern England, when not offered what might be deemed sufficient support, lockdown policies will be resisted and down the line, perhaps even broadly ignored. In this sense, extending the loan schemes makes sense, as it provides businesses with the bare minimum needed for them to shut their doors.

The second, and perhaps more pressing issue, is the one raised by analysts from non-profit research group, Positive Money. The organisation states that between lenders making up to £26 billion during the lifespan of the bounce back loan scheme, and SMEs being forced to take on more debt in order to survive, the entire exercise of locking down boils down to a cynical transfer of wealth away from small businesses.

Positive Money’s executive director, Fran Boait, comments on the extension of the bounce back loan scheme, saying that: “We should be wary of banks’ sudden keenness to pile on more debt to small businesses, especially after figures revealed that lenders are set to rake in more than £1bn from the government in the first year of interest payments on Bounce Back loans issued so far.”

“Yet more debt, which many will struggle to repay, is not the right way to help struggling businesses at this time. Debt should be for investment, while emergency support should take the form of grants and other direct assistance.”

The alternative, Boait might argue, would be for the UK to adopt the Swiss model that the UK’s bounce back loan scheme is based on, with the key difference being that banks are not allowed to charge SMEs interest on fully-government-backed loans. The fact that small businesses won’t be charged a rate of 2.5% interest in Switzerland, could see a faster recovery in the balance sheets of smaller enterprises post-COVID.