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Government loans should be converted into equity in UK businesses

Companies who have taken on large levels of debt run the risk of becoming zombie companies where all their profits are used to service debt, says Richard Churchill.

The result is a detriment to growth, reinvestment or return to shareholders and will ultimately not serve to help repay the deficit created by Coronavirus.

The successor loan scheme must allow for both the Government and owners to share in the growth of a business.  Thus, owners will be motivated and the Government will have a chance of receiving greater funds than advanced through the loan scheme.

The simplest way to achieve this would be for part of the loans to be already advanced, or new loans to be converted into equity, in these businesses. The current network of Coronavirus Business Interruption Loan Scheme (CBILS) loan providers have significant financial data on the borrowers and could be used to help administer the scheme.

The Chancellor has bought himself a little more time to consider his options to ensure the scheme is fair to all and not open to abuse. The business community will look forward to hearing further details once released.

The Chancellor has finally acted to address the main failings of the Bounce Back and CBILS loan schemes. Cash flow is critical for business survival. By extending the initial repayment holiday, providing flexibility over repayments and extending the repayment term of these loans to ten years, he has successfully and responsibly addressed the affordability issue.

Many businesses have been forced to change their business models and it is likely the events of recent weeks will force a further rethink. Accordingly, access to funding is critical so that viable businesses invest in their new plans and grow, providing the much-needed tax revenues the Chancellor requires to balance his books in the medium- to long-term.

However, there must be an equitable balance between the lender (essentially the Government in this case) and business owners to ensure entrepreneurs remain engaged to generate growth.

I am sure the successor loan scheme announced to come into effect on 1 January 2020 will look to address this balance.  Nevertheless, winter is coming, and we don’t want an army of zombie companies to follow.

Would you like to know more?

If you would like to discuss any of the above guidance, please contact Richard Churchill or your usual Blick Rothenberg contact.

For any press queries, please contact David Barzilay whose details are to the right.