How to recapitalise firms that can’t repay Covid loans

Linda J. Dodson

First and foremost, viable but highly indebted SMEs across the UK must have an option to reduce their overall debt burden by converting their government-backed loans into a more manageable form.

Doing so would help free up cash flow for investment, and, as we set out in our report, if this investment takes the form of preferred share capital or subordinated debt, business owners will avoid the need to issue ordinary equity, and therefore need not be concerned about losing control of the enterprise they have worked hard to build.

Creating a government-backed UK Recovery Corporation to manage these holdings would help prevent moral hazard and maintain a healthy distance between private enterprise and the state. And while the government would initially be the principal investor, by inviting private investment into the Corporation over time, this could create an ongoing financing channel for SMEs across the UK.

Clearly, this option would not be suitable for the smallest businesses that have benefited from the Bounce Back Loan Scheme or the small Coronavirus Business Interruption Loan scheme. But they too will need support.

So, for those that have received loans of up to £250,000 we suggest using the tax system to means test and collect repayments – perhaps using taxable profits as a measure of affordability. That way not only will small business owners benefit from reduced financial strain; they will also be spared administrative burden, allowing them to spend their time doing what they do best. In simple terms, it would act a little like a student loan for businesses.

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