The rumbling of imminent repayments is keeping some bosses up at night. But with the economy not yet reopened should the government hold fire? asks Eleanor Pringle
The government has bled cash for months on end in an attempt to quell the economic chaos caused by the pandemic.
Rishi-Sunak--We-Should-Expect-The-Economy-To-Get-Worse-Befor
From furlough to grants, bounce back loans to income support, the chancellor’s office had to dig deeper and deeper into its pockets in order to save businesses great and small.
But the purse strings are once again tightening with the end of such schemes – and bounce back loans are beginning to be called in.
Chancellor Rishi Sunak may have cause to be nervous, however, with a recent report suggesting that up to 60pc of the £46.5bn loaned out might never be repaid.
A recent report from insolvency practitioners Business Rescue Expert said that at worst £27.9bn may never be returned – with the government acting as the 100pc guarantor of the funds.
Andrew Kelsall is a partner in insolvency and recovery for Larking Gowen, working across the firm’s Ipswich and Norwich offices.
He said: “I’ve seen varying predictions on the default rate when it comes to bounce back loans – some people are saying anywhere up to half of loans will be defaulted on. At the moment I’d say it’s impossible to predict until we get into it and we see the liquidations really starting to come through.
“There’s also no telling how much each company could potentially owe. We know the limit is up to £50,000 but that’s dependent on turnover. The minimum is £2,000 but I would hedge a bet that for that amount businesses might not have bothered. In my opinion businesses are likely to owe tens of thousands of pounds instead of just a few, on average.
“We’ve got businesses we’re speaking to at the moment which we know are likely to go into liquidation and there will be more to come. I think we’ll start to see the numbers coming up towards the autumn and start of winter when furlough runs out and the loan repayments properly kick in.”
But with any offer of a helping hand there will always be those who took advantage, with the government now introducing retrospective legislation to understand whether loans
have been used properly by directors.
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill – currently at its second reading in the House of Commons will allow for the disqualifications of directors of companies who dissolved companies which dissolved without becoming insolvent.
Mr Kelsall explained: “What we’re potentially seeing is people opening companies, applying for a bounce back loan, and then dissolving the company before they could file any accounts. That makes it very difficult to trace where the money went and what it was spent on.
“It’ll be particularly interesting to see which companies paid dividends and whether they paid them out while accepting loans.
“What happened with the bounce back loans is that the government needed to react quickly to the crisis we were in – and there was no way of making this vital funding accessible without there being potential loopholes for people who would look to abuse it. What’s happening now with this legislation is that insolvency practitioners will be asked to investigate people who dissolved their companies and potentially recuperate some of the funds.”
But Westminster has been warned not to crack down on legislation and support too harshly in an attempt to grapple themselves back into the black.
Ayobami Illori is a Norwich-based professor of macroeconomics at the Open University, and said that the government risks “shooting itself in the foot” if it calls in its debts too soon.
He said: “Just look at the Delta variant. We didn’t even know about it a couple of months ago and now it’s delaying our economic reopening. We can’t be saying to businesses: ‘The economy isn’t reopen and back on it’s feet yet, but also, we’re not going to support the private sector anymore’.
“Government risks undoing all of the hard work it did with the funds during the pandemic if it suddenly starts withdrawing all its cash when the economy is still coming out of this – and when there’s still a level of uncertainty.”
Andrew Mower, East Anglia’s development manager for the Federation for Small Businesses, suggested an alternative to recouping the cash: “When the bounce back loan scheme launched it was widely expected that we’d have the pandemic under control by Christmas. That wasn’t the case, so there’s understandably going to be a lot of small firms struggling to make the bounce back loan repayments that are now kicking in.
“The government could leave it to the banks to enforce collection, but that would risk the destruction of many businesses who would otherwise be viable and increased unemployment as the furlough scheme winds down.
“An alternative would be to give those who are cash-strapped the option to swap debt for employee equity. This would protect livelihoods, spur productivity and pave the way for a small business-led recovery as we seek to emerge from the deepest recession in modern history.
“It would also overcome the likely objection to unconditional forgiveness of bounce back loans, as business owners would not be the only beneficiaries of a loan write-off.”
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