Coronavirus Business Interruption Loan Scheme

Debate between Rachael Maskell and Owen Thompson

Thursday 5th November 2020 Commons Chamber

[Owen Thompson]

I do accept that point, and it is important that some of those grants have been in place. I would far rather have seen some of the large sums available through CBILS and the bounce back loan scheme made available as grants, as opposed to loans, which add to the debt burden on business.

[Rachael Maskell (York Central) (Lab/Co-op)]

I, too, am grateful to the hon. Gentleman for bringing forward this debate. Ninety-four businesses in my constituency have taken out a CBILS loan, but they are really concerned now about their ability to pay it back, even with the new measures put in place. Does he share my concern that we need to see some underpinning and underwriting in order to secure these businesses for the future?

[Owen Thompson]

I absolutely do and I hope that some of the points I will make later will address the hon. Lady’s concern.

Although improvements were made, the mechanics remain flawed, and take-up is not helped by the fact that the state guarantor is only for 80% of the loan, so risk-averse banks are the gatekeepers to lending decisions. Initially, banks were cherry-picking the very best—the blue chips and the big corporations—while lending to the rest was far harder to find. Now we see a second wave of banks becoming less willing to lend as the uncertainty of the crisis continues and worries grow about the ability to repay. We need the Government to step in to fix that. Of course getting cash to smaller firms was aided by the launch of the bounce back loan scheme in May, and again I commend the Chancellor for taking the action to introduce that. It is a faster process, with a far greater take-up, accounting for about two thirds of the total loans received, with about two thirds of those reaching small and medium-sized enterprises. That is aided by the Government guarantee of 100%, the capped interest at 2.5% and the lender agreeing not to charge fees. That is far closer to what I think CBILS should be if it cannot be a grant. It is a pity that bounce back loans remain limited to up to £50,000, which is nowhere near enough for the needs of many businesses around the country. I hope the replacement for CBILS will take account of the mechanics of the bounce back loan scheme.

By contrast, the commercial companies approved for CBILS can set the rates for business interruption loans, with massive variation in what is offered, averaging around 6% but going up to almost 15%. One local business told me that the initial rate it had been offered was 34%. That may bail out companies in an immediate cash-flow crisis, but it will lead to crippling debt in the longer term when the taxpayer support ends. As The Sunday Times reported this week, some CBILS-accredited lenders are not only charging double-digit interest rates but are charging arrangement fees of up to 5%, a considerable sum to any business. Some are apparently marketing the loans as ways to fund management buy-outs or to refinance existing debts. It looks like some of these loans are less emergency support and more picking the bones of companies in trouble.

Covid-19 has certainly brought out the best and worst in our society. We have seen the very best in the public spiritedness of our communities, essential workers, volunteers and small businesses struggling to keep things moving supporting the vulnerable and saving lives. The very worst, though, are those who see the pandemic as an opportunity simply to make a quick buck on the back of other people’s struggles, whether through price gouging on hand sanitiser, creaming off cash from shadily signed Government contracts for personal protective equipment or, in this case, hiking up fees and interest on loans to desperate companies. There are always people out there who see a disaster as an opportunity to make money, but they should not be able to do so with a Government badge of approval.

Many companies are not taking on CBILS or BBLS loans because having more and more debt around their necks is the very last thing they need. Small and medium-sized enterprises in Midlothian told me that it was an absolute last resort, and that the schemes were far better suited to big players. They say they needed a short-term financial injection, not a loan, but businesses were being pushed towards debt as the only option. One local business that contacted me put it far better than I could have put it myself:

“Business owners are being unfairly expected to shoulder a massively disproportionate share of the burden. Many SMEs have been built up over years of toil and are supported by personal guarantees of directors who are being pushed into positions of potential or actual insolvency which can lead to personal bankruptcy. This is at the bequest of people in authority who are at no personal risk at all. Are they aware that these businesses are where the tax receipts come from that will be needed to pay back the debt now being built? Many of them took years to build into the position where they pay and collect a good level of taxes and if these companies are forced to fail it could take many years to build their replacements”

I hope the Treasury Bench will take note of those comments.

In May 2020, the Office for Budget Responsibility forecast a likely 10% default rate on the loans. By July, that was updated to 40%. In September, the Department for Business, Energy and Industrial Strategy’s annual report went even further, estimating losses ranging from 35% to 60%. TheCityUK recapitalisation group’s report estimated that UK businesses will have £100 billion of toxic debt by 2021, with £35 billion of that related to the Government schemes. The report warned that up to 3 million jobs across the UK, and 780,000 SMEs, are at risk if urgent action is not taken to tackle that projected £35 billion of unsustainable debt from covid loans.

Worryingly, there are reports of banks bringing in specialist debt collectors to help lead the recovery of loans. Of course, the loans spare the banks from the credit risk, but if they cannot be repaid, will we witness thousands of small family businesses pursued through the courts for recovery before the guarantee kicks in? The National Audit Office report into the bounce back loan scheme published on 8 October stated that

“the Bank expects lenders to pursue ‘appropriate recovery processes’”

if companies default. However, it is not clear what that means, and the UK Government need to provide clearer guidance on that process. Given that funds were provided on terms set by the Treasury, it is only fair that, as a minimum, there is a clear framework for recovery, so that customers are treated fairly and consistently, regardless of their banking provider. Even better, why not take the stress off the shoulders of small business and dump the debt that will only hold back recovery? There are also small businesses facing bigger debt on their loans than others, because they rushed to take out the loan when it was the only game in town. They could face a 50 or 60% increase in repayments compared with a bounce back loan. The banks do not seem particularly keen to make it clear that businesses may switch these loans, and I hope that the Government will help to get the message out there—that one simple step could make a big difference to so many companies.

As the pandemic crisis continues and companies try to adapt and rebuild, the best thing the Government could do would be to write off the outstanding debt to SMEs altogether. That would help small businesses have room to recover. The Association of Accounting Technicians called for the bounce back debts to be written off for small businesses, accounting for £40 billion of loans. It says that the “pay as you grow” scheme does not solve the problem; it just defers it, whereas writing off the debt would be a much-needed boost for SMEs and the economy.

[Rachael Maskell]

Charities have been pushed in the direction of CBILs as well, and of course that is completely inappropriate, so to add to the list, will the hon. Gentleman say that charities should have their debt written off as well?

[Owen Thompson]

Yes. Charities, who spend so much of their time having to collect from the public and are now having to adapt to new ways of doing that, are among those many who have been pushed into an impossible situation, where the only game in town is what they had to take. We absolutely need to look to see what we can do to support them, to help them out of this situation.