Third of small businesses worried they will not be able to repay Covid loans

A third of small businesses are worried they will not be able to repay Covid loans, as billions of pounds of government and bank support measures are withdrawn.

More than half of firms told a survey by EY that recovering from the pandemic was a “main challenge” and indicated they may need continuing help.

The findings suggest that as the government’s job retention scheme ended last week after 18 months and Covid loans and payment holidays have tapered off, thousands of small businesses are still struggling.

Anita Kimber, a UK financial services partner at EY, said: “Economic recovery remains a huge challenge, and is being acutely felt by many small firms that are now concerned with how they will repay their debt.”

Almost one in nine small businesses received support from financial institutions or the government, EY found from speaking to 712 firms earlier this year. They are now counting the cost of three national lockdowns and economic dislocation because of Covid, with about 60 per cent saying their sales, revenues and profit margins had fallen and that their supply chains had been damaged.

Banks have extended almost £80 billion in loans guaranteed by the government to 1.56 million firms. They also provided extensions to working capital, overdrafts and capital repayment holidays. Those measures have mostly tapered off. The coronavirus business interruption loan scheme and the bounce back scheme closed on March 31 this year. They have been replaced by the recovery loan scheme, which has had a much lower take-up because of its more commercial terms. Banks have also reduced their own schemes to focus on individual cases of hardship.

As emergency pandemic measures fall away, there is increasing focus on how to solve firms’ historical difficulties with getting loans. MPs in the all-party parliamentary group on fair business banking identified a £22 billion funding gap for smaller firms last month, partly because lending dried up after the financial crisis.

The group has called on the government to develop regional lenders, or community development finance institutions, to pump loans to firms around the country more effectively.

Lord Holmes of Richmond, the group’s vice-chairman, said there was a “need for regional mutual banks to drive the levelling-up agenda, patient capital and a closer connection between the lender and lendee.”