From furlough to the Bounce Back Loan Scheme (BBLS), it’s been hard to keep up with the wide-ranging government support on offer to help businesses keep their ship afloat in the choppy waters of Covid-19.
Amid continued economic uncertainty, the questions are getting louder about whether the schemes will have the desired effect, or if many businesses will sink anyway.
To use a popular metaphor, has the support merely “kicked the can down the road” and delayed inevitable business failures?
Last month, statistics from the National Audit Office (NAO) suggested there could be a harsh reckoning in 2021, warning that taxpayers could lose up to £26 billion on the BBLS alone, which has seen 1.3 million firms borrow a total of £38bn.
The NAO said the 100 per cent government-backed scheme had succeeded in getting out cheap loans quickly to small businesses affected by the crisis – but up to 60 per cent of customers might fail to pay back loans because of minimal credit checks and fraud.
The Coronavirus Business Interruption Loan Scheme (CBILS) offers loans of up to £5 million to businesses which can demonstrate they are viable in the short to medium term in conditions without the pandemic. Again, the stakes are high as the government has provided guarantees to lenders to make often risky loans, which might have been refused in normal circumstances.
The furlough scheme, the largest support package of all – costing an eye-watering £47bn according to latest estimates in late October – has generally been hailed a success, but what will be the long-term impact?
At the peak of the Coronavirus Job Retention Scheme in May, some 30 per cent of the UK workforce was furloughed. This had fallen to 11 per cent by mid-August and the government is confident this number will drop further before it ends. The legacy of its replacement, the Job Support Scheme, which many have criticised as inadequate, is also uncertain.
Businesses have also been able to push back some VAT payments into 2021, and given the chance to discuss delayed or staged corporation tax payments with HMRC. Away from government support, many businesses have also deferred commercial rent bills and energy payments.
Jonny Williams, head of financial services at Womble Bond Dickinson, sees an onrushing “debt tsunami”.
His colleague Chris McLauchan, head of the WBD Scottish banking team, says: “The real test will be whether businesses are able to emerge stronger over the next year when the various government Covid-19 reforms – payment of wages for employees on furlough or reduced hours, VAT deferral, and the effective prohibition on winding-up companies and terminating commercial leases – are unwound.
“For some businesses, this will not be possible. For others, it will be an opportunity to refocus to meet changing consumer needs.”
Philip Knight, head of litigation at WBD, says the often-used “zombie company” analogy is reasonable: “All the support is allowing some companies to stumble on, but only for a short period.”
Knight sees commercial rents as a very specific future challenge: “Over the last six months, banks, landlords and tenants have all been very nice to each other. Now we’re coming to a crunch point where landlords will get pressure from the banks if they can’t pay a commercial mortgage.
“That means landlords will have to ask very difficult questions of tenants.”
For now, Knight says, we are in a very different place to the credit crunch of 2008. He says: “Everyone was suing everyone else they could to recoup money. This time, companies with a moral compass want to do their bit and not be seen as the bad guys.
“Energy companies have responsible processes on recovering debt and don’t want to sue a corner shop or individual who can’t pay a bill because of Covid-19. However, the cumulative debt of energy companies is mounting up and these debts are not being written off, just postponed. This will start to hit some time in 2021.”
Knight also stresses that companies can’t be liquidated in Scotland at the moment, saying: “It gives breathing-space to companies, but it’s not much help in the long run and I think we’ll see thousands of company insolvencies and individual sequestrations in the coming year.
“In many ways, the support is a sticking plaster that’s delaying the inevitable. In 2021, we will see banks, landlords, energy companies and government bodies all pursuing debt. This will create a huge backlog in debt recovery hearings, which have been pushed back – another example of kicking the can down the road.
“These hearings can take one or two years to resolve normally. Lots of disputes will kick off in 2021 but there will be a huge backlog and it could take two or three years for those cases to trickle through.”
Knight reinforces the point that CBILS and BBLS must be repaid, and fears smaller businesses who haven’t deployed loans wisely won’t make it: “Some of those loans are going straight into paying commercial rents and not for the purposes intended, to keep the business ticking over and pay staff.”
Williams agrees, but says others have been more sensible: “There are companies where the money went out of the door pretty much straight away, but prudent businesses have taken loans and put the cash aside for a rainy day, to ensure they have cashflow when they need it.”
Williams has particular concerns about the self-employed, but is also buoyed by the entrepreneurial spirit shown during the pandemic.
He says: “The self-employed have suffered as they didn’t get the same level of support. Some just saw their businesses die overnight and have been surviving on £90 [Universal Credit] a week. But some entrepreneurs are setting up new businesses and doing really well.
“Those who have done well have diversified and ensured they are relevant to people’s lives and provide services they need. Those who have succeeded have adapted very quickly to a new online world, put money aside and behaved prudently because they see this is going to have a very long “tail”.”
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