The past six months have been hard on everyone, and many SMEs have found themselves struggling financially. The government has created a variety of opportunities allowing businesses to borrow money or defer payment, but this has come at a price — high levels of unsustainable debt.
Financial Predictions for Business
A recent report by TheCityUK has predicted that UK businesses, the vast majority of which are SMEs, are facing around £70bn in unsustainable debt by March 2021 — about £20bn of which come from coronavirus loan schemes backed by the government.
Incredibly, this is in some ways good news. In May, predictions suggested that the figure would be more like £102bn, with £35bn coming from the government-backed loans. Even so, these are frightening figures.
The reduction in the projected figures are due to a number of factors, including a more optimistic outlook for the economy. Nevertheless, questions remain about how businesses faced with this level of debt are going to recapitalise.
How Are the Debts Made Up?
Overall, SMEs are under immense pressure to protect both operations and jobs. A raft of measures the government brought in have provided a breathing space, but mostly only by deferring the blow.
Quite apart from the “bounce back” loans, which businesses will need to start paying back next year, various schemes are winding down. These include deferred VAT and other taxes, as well as loan repayment holidays and interest-free periods.
As Miles Celic, Chief Executive Officer, TheCityUK, puts it, “Focus must turn from immediate firefighting to addressing these longer-term challenges — and supporting the recapitalisation of millions of SMEs remains a critical issue.”
What Can Be Done About Unsustainable Debt?
TheCityUK’s Recapitalisation Group has proposed various measures the government might consider to help soften the blow of this debt. These include a further twelve-month extension to the capital or repayment holiday on government scheme loans.
These would be welcome, but it’s important for SME owners to remember that taking on more and more debt isn’t necessarily the answer. If you don’t have a plan for realistically repaying it at the end of the specified period, you’re only putting off the problem.
On the other hand, if these relief measures go hand in hand with creative rethinking of your business to position itself better in the “new normal” marketplace, such an extra period of grace could be just what you need. It’s essential, though, as always in difficult times, to ensure all your systems are working at 200% efficiency.
That goes above all for your credit control. Get in touch with me for a chat if you’re having problems with unpaid invoices — because they could be the difference between survival and going under.