Businesses face a financial cliff as UK support for Covid wanes

Barbara Easter and her husband will long past retirement age by the end of the debt their outdoor events business, Cotswold Marquees, took on to survive the pandemic.

This month, your bank will start demanding repayments – and that’s not your only concern. Some wages have to be covered again as vacation benefits expire. Business tariffs are resumed. It now takes “one day at a time to get through,” says Easter, with the question of how many events will be held this summer.

Easter is among the thousands of UK business owners facing the financial fallout from the pandemic as concerns grow over whether government efforts to keep the economy afloat will be enough.

Ministers hoped for consumer recovery, which would support a wider economic recovery. But many companies like Cotswold Marquees have been struggling financially after the past 18 months as lockdowns have drained reserves and trade is still restricted or subdued.

“A rising tide lifts all boats – the economy is experiencing a mini-boom, fueled by consumers and pent-up demand,” said Stephen Welton, CEO of BGF, one of the UK’s most active investors in smaller businesses.

“But how long will it take? When the rooster [of government support] At the same time, while these companies with huge accumulated debt are trying to get back on their feet, it becomes quite problematic. “

If every creditor claims 100 percent of their debt and most creditors need the money, thousands of businesses could go bankrupt

Bankers are also sounding the alarm. At a recent meeting with the prime minister, they warned of a possible “debt time bomb,” according to those familiar with the matter.

More than £ 75 billion has been borrowed from companies through Covid loan programs – the majority of the 1.5 million companies that have taken out easy repayment loans.

“It’s definitely going to be messy and it’s going to come into effect over the next six to nine months,” said one senior banker. “It won’t be a single tidal wave, but even if the economy recovers, negative news will get through and you will have to be ready with your tin hats.”

In a series of data dumps over the past few weeks on an EU website – compulsory under the Brussels State Aid Disclosure Rules – the government has listed the names of tens of thousands of companies loaded with new debt.

Some of the people on the list are known. More revealing, however, is the predominantly ecclesiastical majority, with dozens of dentists, golf clubs, food stalls and opticians, and other small-town businesses known only to local customers.

Bankers have also raised concerns about this debt to tax officials. “My colleagues in the Treasury are very aware of this,” said one banker. However, it is questionable whether the government will find any further appetite for help. “What happens in the end will be a political judgment,” he said.

The initial repayment of Covid loans was positive, according to bankers, as only a “single-digit” percentage of borrowers failed to cover interest on the first tranche of bounce-back loans in June, according to two senior executives familiar with industry reporting are familiar.

This is better than some feared. However, bankers say it is too early to assess the impact repaying this debt will have, combined with a number of other new costs that will pile up after the Covid support programs end.

“All of this is not a gift, his support and needs to be transacted,” said Steve Russell, director of corporate restructuring at accounting firm PwC. “The pressure will increase and many of these companies will need to be restructured. And that will – unfortunately – lead to more companies going bankrupt. “

The government has postponed several financial sticking points: the extension of a moratorium on commercial rents and a ban on Covid-related fulfillment orders. HM Revenue & Customs is committed to benevolent unpaid taxes, and bounce-back loan terms can be extended to up to 10 years.

But other support is starting to wane this month, and business leaders fear it has come too soon. Last month, the Federation of Small Businesses warned Kwasi Kwarteng, the Secretary of the Economy, that the “debt burden that small businesses face is a major challenge for the UK’s economic recovery”.

In the letter read by the Financial Times, the group said, “At best, Covid-related debt will deter companies from investing to innovate or improve productivity. In the worst case scenario, it will cause a significant number of otherwise viable businesses to go under. “

Mike Cherry, national chairman of the Federation of Small Businesses, warned of “a real economic hotspot on July 1st”, adding, “This is the moment when the vacation will wear off, business rates return for hardest hit sectors in England and deferred sales tax payments become due. “

Cherry said four in ten of the FSB’s debt-ridden members said that borrowing was “unmanageable” last year. “If support is withdrawn, loan repayments will start to bite.”

The number of bankruptcies was near an all-time low during the pandemic, but experts wonder how long this could take. Mark Phillips QC, a bankruptcy law expert, said many companies are heading towards a financial cliff.

“If every creditor claims 100 percent of their debt and most creditors need the money, thousands of businesses could go bankrupt,” he said.

Phillips has partnered with R3, the insolvency trustee trade association, to provide free advice to businesses.

Groups of companies have asked for further financial support for the development phase of the economic recovery. Welton from BGF is of the opinion that there must also be a more formal system of recapitalizing smaller, debt-ridden companies.

But those requests seem to have failed, given the tough line Kwarteng has taken in recent interviews. “The vacation wouldn’t last forever, and with we’re opening in two weeks, this is the right time to think about the payroll the government and employers are paying,” he told BBC Radio last week.