Barbara Easter and her husband will be long past retirement age by the time the debts their outdoor events business, Cotswold Marquees, took on to survive the pandemic are due to end.
This month, their bank will start to ask for repayments — and it is not their only worry. Some wages will need to be covered again as furlough support tapers. Business rates will resume. They now take “one day at a time to get through”, said Easter, with questions over how many events will be happening this summer.
The Easters are among thousands of UK business owners grappling with the financial fallout of the pandemic, as concerns grow over whether government efforts to keep the economy afloat will be sufficient.
Ministers have rested hopes on the consumer recovery supporting a broader business recovery. But many businesses such as Cotswold Marquees are struggling financially after the past 18 months, with lockdowns having wiped out reserves and trading still restricted or subdued.
“A rising tide lifts all boats — the economy is going through a mini boom, driven by consumers and pent-up demand,” said Stephen Welton, executive chair of BGF, one of the UK’s most active investors in smaller businesses.
“But how long will it last? If the tap [of government support] is turned off at the same time as these businesses carrying huge accumulated debts are trying to get up and running, it becomes pretty problematic.”
Bankers have also been raising the alarm. At a recent meeting with the prime minister, they warned about a potential “debt timebomb”, according to people familiar with what was said.
More than £75bn has been borrowed by businesses through Covid loan schemes — the majority by the 1.5m companies that took light-touch bounceback loans.
“It’s definitely going to be messy and the next six to nine months are where that comes through,” said one senior banker. “It will not be a single tidal wave but even as the economy recovers negative news will be coming through and you’ve got to be ready with the tin hats.”
In a series of data dumps over the past few weeks to an EU website — mandated by Brussels’ rules on state aid disclosure — the government listed the names of tens of thousands of businesses loaded with new debt.
Some on the list are well known. But more revealing is its mostly parochial majority, with scores of dentists, golf clubs, takeaways and opticians and other small-town businesses that would be familiar only to local clientele.
Bankers have also raised concerns over this debt with Treasury officials. “Colleagues at the Treasury are very alive to it,” said one banker. Whether or not the government finds further appetite to help is in question, however. “What ends up happening will be a political judgment,” he added.
The initial repayment of Covid loans have been positive, according to bankers, with only a “single-digit” percentage of borrowers failing to cover interest on the initial tranche of bounce back loans in June, according to two senior executives familiar with industry wide reporting.
This is better than some feared. But bankers say that it is too early to judge what impact the need to repay this debt will have when combined with other new costs that will stack up as coronavirus support schemes end.
“All this is not a gift, its support and will need to be unwound,” said Steve Russell, head of business restructuring services at PwC, the accountancy firm. “The pressure will start to build, and many of these companies will have to be restructured. And that will lead — unfortunately — to more companies going bust.”
The government has delayed several financial pinch points: extending a commercial rents moratorium and a ban on Covid-related winding up orders. HM Revenue & Customs has pledged to take a sympathetic approach to unpaid taxes, and bounceback loan terms can be extended for up to 10 years.
But other support begins to taper this month, and business leaders worry that this has come too soon. Last month, the Federation of Small Businesses (FSB) wrote to Kwasi Kwarteng, business secretary, warning that the “debt burden facing small firms represents a huge challenge to the UK’s economic recovery”.
In the letter seen by the Financial Times, the group said: “At best, Covid-related debt will hold businesses back from investing in order to innovate, or improve productivity. At worst, it will lead to a significant number of otherwise viable businesses going under.”
Mike Cherry, FSB national chair, warned of “a real economic flashpoint on 1 July”, adding: “This is the moment when furlough will start to wind down, business rates will return for hard-hit sectors in England, and deferred VAT payments will become due.”
Cherry said that four in 10 of debt-laden FSB members said that borrowing levels were “unmanageable” last year. “As support is withdrawn, bounceback loan repayments will start to bite.”
The level of insolvencies has been at near historic lows through the pandemic but experts wonder how long this can last. Mark Phillips QC, an expert in insolvency law, said that many businesses were heading for a financial cliff edge.
“If every creditor demands 100 per cent of their debts, and most creditors will need the money, we could see thousands of companies going bust,” he said.
Phillips has been working with R3, the trade body for insolvency practitioners, to secure free advice for businesses.
Business groups have asked for further financial support through the unlocking stages of the economic recovery. Welton from BGF believes that there will also need to be a more formal system of recapitalisation of smaller businesses burdened with debt.
But these pleas appear to have failed given the hard line taken in recent interviews by Kwarteng. “Furlough wasn’t going to last for ever and as we open up in two weeks’ time this is the right time to think about the balance of payroll which the government pays and which employers pay,” he told BBC radio last week.