Coronavirus business help: Banks set out student loans scheme for struggling businesses

UK banks have proposed a new ‘student loans’ style scheme to help businesses that may struggle next year once their Coronavirus Business Interruption Scheme (CBILS) loans start to be paid back. The banks that are proposing the scheme claim that 780,000 businesses and three million jobs could be at risk if businesses cannot defer their loan repayments.
The proposed scheme would create a UK Recovery Corporation to which businesses would transfer their loans under CBILS into a tax debt with HMRC. This would allow businesses to pay back the debt when it is affordable to do so and to spread this debt over a longer period – potentially decades. The Banks believe this would be a more viable alternative than state backing of hundreds of thousands of struggling businesses.

To date £46 billion has been lent on Government-backed loans consisting of £31 billion in Bounce Back Loans of £2,000 up to £50,000, £12 billion in CBILS loans of £50,000 up to £5m and £2.7 billion of loans greater than £5m. Four out of five businesses have been accepted on Bounce Back Loans, that come with a 100% Government backed guarantee, while only half of businesses applying for CBILS loans have been successful, with the lower Government backing of 80%. This means the taxpayer will foot the bill on all future Bounce Back loan defaults and 80% of CBILS loans.
CBILS and Bounce Back Loans have provided essential cashflow to businesses whose trade has flatlined if not disappeared during the lockdown period. However, with UK growth not returning as quickly as expected and the tapering of the furlough scheme through to October, it is acknowledged that many of these businesses will not be financially strong enough to start paying back a triple whammy of CBILS loans, deferred VAT and business rates, all of which become due from March 2021.
The concerns about job losses are also supported by findings published today by the British Chambers of Commerce. This found that 29% of businesses expect to make redundancies in the coming three months before the Furlough scheme ends in October. The furlough scheme has already paid 80% of the wages of more than 9 million people with the Chancellor announcing a further £1,000 incentive per employee for businesses that return furloughed staff back to work and are still employed in January 2021. Micro businesses of between five and nine employees have placed more than half (57%) of their workforce onto furlough, placing these as potentially at greatest risk of suffering once the furlough scheme and the requirement to pay back CBILS, business rates and deferred VAT occurs next year.
It is expected if the banks’ proposed UK Recovery Corporation scheme goes ahead that over time these loans would be sold off to investors, in a similar way to the bad debts resulting from the 2008 financial crisis or like student loans.

The scheme is still at a proposal stage and matters of how to prevent fraudulent use of the scheme have not yet been outlined. Agreement on controls of dividend payments, salary bonuses and rules for when a firm is strong enough to repay all are yet to be agreed.

The Government is already set to foot the bill for businesses that default on CBILS loans and will now be looking at how to manage the potential of billions of pounds in guarantees owed to banks if businesses default next year. The cost to the public purse and to jobs across the UK is potentially catastrophic.