‘Handed out like lollipops’ why the Coronavirus business loan schemes risks failing the people they were designed to help
This article is written by Natasha Atkinson, Business Restructuring Partner at DWF
Government loans provided thousands of businesses with liquidity and a temporary lifeline at the start of the coronavirus pandemic. Yet perversely, they may end up also contributing to the ultimate downfall of many of these organisations.
Handed out like lollipops, the Government has guaranteed a total of £52 billion through its Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS), to date.
As the British Business Bank extends the deadline for coronavirus business loans to 30th November, and with the number of businesses using the CBILS topping 60,000 in August, thousands of firms risk falling into a spiral of untenable debt.
Indeed, by the end of March 2021, it is estimated that between £32 billion and £36 billion of Government-backed loans could become unsustainable with borrowers struggling to repay them.
This certainly wasn’t the original intention. However, these loans should only have been taken out as a last resort, once businesses in trouble had undertaken all other stabilisation measures, such as negotiating with landlords, tackling supply chain issues and right-sizing their workforces.
Instead, as businesses panicked with the onset of lockdown, too many reached straight for the loan option while maintaining their pre-pandemic overheads.
Lack of advice
Part of the problem seems to lie in a lack of appropriate advice and direction that ought to have been available to, and accessed by, businesses when the loan schemes were first introduced. The loans should only have been viewed as helping businesses to manage short-term liquidity issues.
What’s more, directors should prepare themselves for the inevitable scrutiny of their actions in taking on these liabilities. They will need to be able to demonstrate how they did, or how they plan to, use the cash they borrowed through the various loan schemes to keep their businesses afloat.
From a legal point of view, the only relaxation, albeit temporary, is with respect to wrongful trading actions. All other rules against inappropriate actions remain firmly in place and will be deployed against directors in the event of an insolvency.
Finding a way through
Approximately one in five businesses is estimated to have less than one month’s cash reserves left. Worryingly, this figure increases to one in three where businesses that have taken on loans are concerned.
However, for businesses facing difficult times ahead, there is at least a useful checklist of actions worth considering. In addition to shoring up liquidity, they should ensure they implement adequate long-term recapitalisation and move from full contingency-planning mode to future-planning mode. But delaying repayment obligations, even for another year, will be insufficient to meet their longer-term needs.
And Government, regulators and the banking sector must play their part in helping to avoid a wave of insolvencies that would only add to potentially dramatic increases in unemployment, lost tax revenues, and the stagnation of the UK economy. There is a clear need for urgent collective action to find solutions that help viable businesses recover and remain resilient as they emerge from the crisis.