RUTH SUNDERLAND: Simply loading up firms with loans, as is happening now, is not the answer to the coronavirus crisis
What will happen to small firms once the immediate peril has passed? This is a question banks and politicians need to think about before it morphs into a delayed shock to the economy.
Businesses now can apply for business interruption loans, and for ‘bounce-back’ lending, on favourable terms – in the first year, there is no interest.
But these are loans, not grants, and people may take them out of desperation, leaving themselves over-indebted with no real prospect of servicing their borrowings. Bearing in mind that some trading could remain subdued, this is worrying.
Looking ahead: Chancellor Rishi Sunak introduced business interruption loans in response to the coronavirus pandemic
On the ‘bounce-back’ loans in particular, the banks are doing fairly basic credit checking – not, for once, because they are lending irresponsibly, but because the Government has made clear it wants to get the money out.
The business interruption loans were too bureaucratic, but there are fears that ‘bounce-back’ lending is overly lax.
Down the line, we may find that too many basically viable firms have taken on too much borrowing and, ideally, would want to recapitalise by swapping debt for equity. At this point, there is a gap in the system.
Conventional venture capital and private equity investors are not in the very small end of the market, so entrepreneurs are left with a hotch-potch of angel investors.
One answer could be a British equivalent of Germany’s KfW, which stands for Kreditanstalt fur Wiederaufbau – or Credit Institute for Reconstruction. It was set up in 1948 as part of the Marshall Plan after World War II and has, among other things, supported the German Mittelstand – the backbone of small and medium family firms – ever since.
As well as lending, it also provides equity financing for firms too small to go to the stock market. So far KfW has proved far more efficient at pumping out emergency support than our banks have at dispensing the business interruption scheme here.
That is being done under the auspices of the British Business Bank – our nearest equivalent to the KfW, but nothing like as effective. The situation is dangerous for the banks too. At the moment, this is not a banking crisis. Our biggest lenders are making profits, they have passed stringent ‘stress tests’ and are well capitalised.
But a wave of potential small business debt defaults some years from now is not a happy thought. The last thing we need is to emerge from the pandemic with millions of firms struggling to service debt, acting as a major drag on recovery and pulling down the banks.
Instead of small businesses bursting with entrepreneurial zest, ready to bounce back into life, the risk is we will have created a legion of debt-zombies.
Sir Adrian Montague, chairman of insurer Aviva, is to lead a taskforce looking at recapitalising companies that have put themselves in hock to get through the pandemic. A working group is being put together to look for solutions.
As a former chairman of private equity operator 3i Group, Sir Adrian has the right credentials. Like the KfW, 3i was created after World War II to back smaller companies that could not access public equity markets.
Unlike KfW, however, 3i did not plug the funding gap for those businesses and has moved far from its now barely remembered origins.
Should the state take stakes in small firms, as some are now suggesting? How would officials pick out those that are viable from the duds? Would the whole exercise turn into some monstrous taxpayer-funded version of Dragons’ Den?
Simply loading up firms with loans, as is happening now, is not the answer.