Up to £36bn worth of government-backed business loans could become toxic by March of next year, with businesses in the property, accommodation, food services and construction sectors most at risk.
A new report from the Recapitalisation Group, EY and lobby group TheCityUK predicted that small- and medium-sized enterprises will accumulate £97bn-£107bn worth of unsustainable debt by March 2021, with a third of that coming from government-backed loans such as the coronavirus business interruption scheme (CBILS).
“Lifting the debt burden from the shoulders of otherwise viable businesses will be essential to supporting a robust and sustainable economic recovery,” said Miles Celic, TheCityUK’s chief executive.
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“However, this is a huge and complicated challenge. It is already clear that there won’t be a one-size-fits-all solution.”
The report has called on the Bank of England and the Treasury to implement a series of measures which could limit the amount of bad debt on the horizon. These include allowing lenders to convert debts into equity, implementing a profit tax, and introducing debt repayment holidays.
“This report is an extremely welcome contribution as we look to restart, rebuild and renew the UK economy,” said Adam Marshall, director general of the British Chambers of Commerce.
“Many businesses have taken out loans to help weather the unprecedented economic impact of coronavirus, and bold solutions will be needed to prevent thousands of firms from falling into a spiral of unsustainable debt.
“A number of the approaches proposed here should be investigated further – including a ‘student loan’ type instrument, where repayments begin once revenues return to pre-crisis levels, for smaller firms.
“Government, regulators and the City must now work together with business communities to find solutions that help viable businesses recover and invest as they emerge from this crisis.”
A full version of the report will be published in July.