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Forty-three percent of businesses that have taken out either Bounce Back Loans or Coronavirus Business Interruption Loans say that they will be unable to repay the loan, according to the Business Banking Resolution Service (BBRS).
The Bounce Back Loan Scheme offers struggling businesses up to £50,000 interest free for the first 12 months, with a low 2.5% interest rate after that, while the Coronavirus Business Interruption Loan Scheme supports loans of up to £5 million per small business.
According to new data from UK Finance, both schemes have lent £22bn of government-backed loans between them to almost half a million businesses. Over £14bn has been lent through Bounce Back loans, along with more than £7bn via the Coronavirus Business Interruption Loan scheme which is aimed at slightly larger players.
27% of respondents to the BBRS survey said they do not believe they will be chased for the debt, while 16% stated they will not be financially able to repay.
Lewis Shand Smith, chairman of the BBRS, said: “Government-backed loan schemes have provided a lifeline. But it is critical for customers to understand that, just like any other loan, they will be required to repay 100% of the money they borrow under these new schemes. There needs to be clarity about that now to avoid the risk of storing up problems for the future.”
Commenting on the research, CEO of Nextfin, Sacha Bright, said: “Most entrepreneurs will see the 100% guarantee as an opportunity to liquidate their businesses if the limited company starts to struggle.
“Whereas, if loans had a personal guarantee, the directors may put in more effort to keep the company alive and repay the loan.
“It is human nature to try and avoid putting yourself through lots of stress and pain to repay a debt when you could liquidate a business and start over.
“This is why we NextFin, right from the start, for the government to encourage private equity investment, so as to avoid strapping a business with debt.
“The Bounce Back Loan Scheme should now be scrapped and replaced with an extension to EIS and SEIS investment allowances. It has served its purpose for very small businesses, and was a fast solution to get cash to struggling businesses.
“I commend Rishi Sunak for listening to small businesses and introducing the 100% guarantee. But he should expect big defaults. Indeed, he needs to look upon these loans as grants, and be prepared to negotiate with companies to write-off large amounts of this debt to recover some of it, so that many of these micro-businesses do not liquidate.”
“Frankly, the government is controlling businesses with debt and is not doing enough to stimulate enterprise. Like the old saying, give a man a fish and he’ll eat for a day, give him a rod and he’ll eat for a lifetime.
Author: Oliver Murphy and Sacha Bright
Disclaimer
To the best of our knowledge, the information we have provided is correct at the time of publishing. SEIS and EIS tax benefits are dependent on your financial circumstances. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.
Tagged: coronavirus cbils bbls sme finance loan entrepreneur
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