The government is facing calls to allow small businesses to delay repayments of state-backed loans until they make a profit so that they can avoid collapse and job losses.
The Federation of Small Businesses said that the rules of bounce back loans needed to be made more generous to lessen the burden on companies struggling because of the coronavirus pandemic.
The call for relief on loan repayments came as companies reported a gloomy outlook, with a fifth predicting that business would become “much worse” over the next three months than it was in the preceding period, according to a survey by the federation.
Mike Cherry, national chairman of the federation, said: “A guarantee that they won’t have to start making repayments until they’re turning a profit would give them the confidence to invest and hire today, rather than further down the line, when [it] may prove too little too late.”
More than a million small companies have borrowed a total of £33 billion under the bounce back scheme, which offers loans of up to £50,000 that come with a 100 per cent state guarantee. The loans were launched in May after an outcry about the criteria attached to the coronavirus business interruption loans, which made it difficult for small businesses to qualify.
There are concerns among banks and government officials about companies’ ability to repay. At present the terms include no payments or interest for the first 12 months and the capital to be repaid within six years at a government-set interest rate of 2.5 per cent.
Some commentators are asking whether those terms should be relaxed, or if the Treasury should write off unpaid loans to avoid small businesses failing or entering a zombie period of meeting their debt obligations without the ability to invest for growth.
The Treasury is in talks with banks over the issue, but the chancellor is understood to be reluctant to write off the debt, as it would mean that there was not a level playing field with businesses that had struggled through without state-backed loans and because it would add to the government’s debt burden.
The Office for Budget Responsibility estimates that £53 billion will have been handed to small firms in bounce back loans, with 40 per cent likely to default.