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The government is preparing to respond to growing concerns over the economic fallout from a second wave of coronavirus infections by extending its Covid-19 emergency loan program for businesses.
In the middle of the edit speculation about the launch of new restrictions on business and social life as the number of cases increases, the Chancellor, Rishi Sunak, is expected to announce the extension of four state-backed loan programs until the end of November.
In a development that would provide additional support to struggling businesses until the fall, sources with knowledge of the government’s plans said an announcement would be made as early as Tuesday. The move was first reported by the Financial Times and comes as fears grow about Britain’s fragile economic recovery and the risks of a second wave.
Almost £ 53bn in government guaranteed loans have been made by commercial banks to businesses since March, with the Treasury guaranteeing 80% of the value of the loans. However, three of the programs were due to close to new applications at the end of this month, while the fourth, the “rebound” program that gives banks 100% government support, was due to expire in early November.
All four will be extended until the end of November, the sources said, while banks will be allowed to process loans until the end of the year.
Business leaders have called for an extension amid growing fears of a difficult winter ahead for the UK economy. Despite a strong rebound in activity as foreclosure measures have been relaxed, the Bank of England expects the economy will not recover the lost ground until the end of next year at the earliest. Serious risks also remain due to rising unemployment and rising Covid-19 cases.
Launched as Britain went into lockdown in March, the coronavirus business disruption loan program has been used by more than 60,000 businesses, borrowing a total of £ 13.7 billion, with loans of up to £ 5million. Commercial banks lend money, but can recover up to 80% of the loan value from the government if the borrower later defaults.
The large business version of the program has supported £ 3.5bn in loans and offers a similar guarantee, but up to £ 200m. The majority of loans have been made through the ‘rebound’ program, with over 1.1 million businesses borrowing over £ 35 billion in loans of up to £ 50,000.
The Treasury will also expand the future fund, which offers loans to fast-growing startups as well as matching funding from private investors. Businesses can borrow up to £ 5million using loans convertible into equity investments. Almost 600 loans worth £ 588million have been approved to date.
The expansion of the programs comes as companies may struggle to repay their debts. The Office for Budget Responsibility, the government’s independent economic forecaster, has estimated that up to 40% of rebound loans could default.
Earlier this month, the center-right think tank Onward, which has close ties to the Treasury, said crippling debt levels accumulated during the crisis would hamper UK economic recovery because companies would be reluctant to invest and hire workers in the face of massive debt repayments.
He said a debt relief program should be used to allow companies to gradually repay state-guaranteed loans taken out during the crisis through a surtax on profits and payments to shareholders. It would depend on the income level of a business, similar to the student loan system for tuition.
Shadow Chancellor Anneliese Dodds said targeted government support was needed for companies struggling with debt. Speaking at Labor’s fall virtual conference, she said: “From March next year, repayments will begin for loan programs put in place to help businesses weather the crisis. But on the current trend, our economy will not be back to normal at all by then.
“Without effective government action, many companies will hit the wall – with more job losses and more costs to public finances.”
The former chancellor Georges osborne also asked Sunak to write off debts incurred by companies under government-supported programs.
A spokeswoman for the Treasury said: “As we have said on several occasions, we keep our economic support package under constant scrutiny. We have already provided unprecedented support worth £ 160bn to the businesses affected throughout this period. “
‘This includes government guaranteed loans, a reduction in VAT for the tourism and hospitality sectors, grants of £ 25,000 and the coronavirus job retention scheme, which has supported the salaries of 9.6 million people so far. “
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