A think tank has recommended that the government should allow businesses to repay state-backed Covid-19 support loans only when they turn a profit.
Onward’s research paper, ‘Paying it forward’, proposed a New Start scheme, under which HMRC would allow firms to pay down their government-issued debt over a long period, through a surcharge on taxable profits and shareholder salaries.
The think tank said that allowing businesses to pay back loans under the coronavirus business interruption loan scheme (CBILS) and bounce back loan scheme (BBLS) in a similar arrangement to the student loan system for tuition fees, would benefit their recovery and the economy.
This would be by providing the economic flexibility needed to overcome the Covid-19 crisis whilst maximising taxpayer value for money.
The research paper claimed that this method of income-contingent loans is better than a possible alternative of converting businesses’ debt-to-equity.
It explained that this solution has the same benefits of debt-to-equity swaps of giving companies time to repay their loans and focus on their recovery, but it does so without the administrative complexity and cost that debt-to-equity swaps would require.
And to overcome the possible challenge of businesses cutting profits by increasing salaries or investment, the think tank has recommended the inclusion of shareholder income alongside trading profits.
The think tank’s report, which uses data from the Office for National Statistics’ business impact of Covid-19 survey alongside a large sample of firm-level data, found that nearly one in 20 firms (4.3 per cent) is likely to be pushed into technical insolvency because of the levels of debt they have already built up since March.
If they can continue to meet their day-to-day commitments these firms will be able to continue operating, but if dissolved they wouldn’t have the assets to cover their liabilities.
“The government’s loans schemes have been highly effective at helping firms through the worst of the crisis, but they represent a double-edged sword in that they have weighed down firms with debt just as we need them to invest to spur the recovery,” said Angus Groom, Onward fellow and report author.
“The chancellor has so far appeared reluctant to consider restructuring the newly issued Covid-19 debt.
“The New Start scheme gives the option to intelligently delay repayments only for those firms who need it.
“This can be rolled out as a scheme managed by HM Treasury and implemented and controlled by banks—all the while maximising taxpayer value for loans that the government has already underwritten.”
In June, a report from the Recapitalisation Group, EY and lobby group TheCityUK found that up to £36bn worth of government-backed business loans could become toxic by March of next year.
Since then, peer-to-peer lending platforms have voiced concerns about companies repaying CBILS and BBLS and said the schemes should be restructured to give firms more time to repay the loans.