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The current business environment, coupled with the mounting loan burden, could sink the small and medium scaled businesses in the United Kingdom by as much as £105 billion in debt by March Next Year. While, making this statement United Kingdoms’ financial services sector advocacy body, TheCityUK has written a letter to the new Bank of England governor Andrew Bailey, stating that most of these businesses will require full-scale recapitalisation in order to alleviate the state of indebtedness. The coronavirus pandemic, which is all set to push the British economy into its worst recession in 300 years, has hit the small and medium scale businesses in the country the hardest. In order to support these businesses and the millions of people who work in them, the government had announced several stimulus measures in the month of March to help them tide through these troubled times. One of these measures allowed to most of these businesses was to retain their employees while the government paid 80 per cent of their salaries, the other stimulus measure provides them loans under lucid terms, whereby the business need not pay any interest in the first year, nor any repayment was due for that period.
The small and medium-sized businesses in a country are the lifeline of a country. These businesses not only are the largest employers in the country but also more often than not provide employment to semi-skilled and non-skilled workers. These businesses do not have deep pockets and usually live on their cash registers. They buy provisions on a daily basis or on a weekly basis and have a fast turnaround. When there is a situation like a lockdown, and the footfall into these businesses dries up, these businesses are more likely to come into a state of bankruptcy. Thus, it requires urgent measures to protect these businesses otherwise, the short-term consequences for an economy could be disastrous. The biggest problem of these businesses is their very low credit standing, them being largely dependent on their cash registers makes them less creditworthy than large businesses. Hence in times like these banks are also reluctant to lend them money. Till the time the lockdown is in place, these businesses could survive with the largess shown by the government, but once the government support is withdrawn, it would be difficult for most of the businesses to stand back on their feet. The government though has announced that there will be a moratorium on interest and capital repayment for a period of one year, but it is highly likely that the support will have to be extended much beyond that period to allow these businesses sufficient opportunity to stand back on their feet. What also needs to be taken into consideration is the state of the labour in the country. Since most of these businesses would have taken advantage of the state furloughing scheme for long, a sudden shutting of the shop by them will also mean millions of people becoming unemployed, for which the government will have to provide support through unemployment benefits.
TheCityUK further states that the government will have to come up with an equity sharing like scheme after March next year if it wants these businesses to sustain. It stated that these businesses which employ nearly 16 million of the country’s population and generate £2 trillion worth of revenue every year are a major contributor in tax income to the exchequer. Any abrupt changes in the business environment will not only be disastrous to these businesses but also to millions of people working in these businesses, the GDP of the country as well as government revenues. It is thus important that the government should tread very carefully when withdrawing its emergency support to these businesses, otherwise it will create a colossal problem which the government had been trying hard to avoid in the first place. It is also to be noted here that there are different industries who have been affected differently by the pandemic and will take different periods of time to fully stand back on their feet. The government will have to devise its withdrawal plan very meticulously so that it does not have any adverse impact on the economy and especially these small and medium businesses.
As of now the government is indeed hard-pressed for cash, as it is already spending huge amounts to support the economy from collapsing, the initiatives though will go a long way in preventing the economy for sustaining deep damage, but all these efforts will become undone if any mistakes are made in creating abrupt changes in the business environment in the country. Even when the lockdown conditions are relaxed in the country, the demand conditions will take a long time to get back to the pre-March 2020 levels. The lockdown conditions though may get relaxed, but social distancing measures will be fully in place, meaning that footfalls will be very low and even if they increase it will happen at a very low pace. Under these conditions to expect that businesses will be able to stand back on their feet at the earliest so that they may be able to repay their loans is a far cry. The Bank of England, as well as the Government, have to sit together to devise ways and means to deal with the above situation.
With the easing of the lockdown in the country, there is also the additional risk of a resurgence of the pandemic. The small and medium businesses which mostly consists of businesses who rely on number of footfalls will face the additional risk of being allowed by the government to resume their operations last after all other businesses have opened and the risk of a resurgence of the pandemic is reduced to manageable levels. Given what the circumstances are, it is very difficult how the situation will pan out in the next few days when the lockdown gradually starts to be withdrawn. Under such circumstances imposing a timeline on these businesses will not work in anyone’s interest. The government though has the plan to extend the furloughing scheme till September of this year keeping in mind the hardships of these businesses; it can also be reasonably expected now that the bounce back loan scheme will see some form of extension now, either in the form of interest holiday or repayment holiday.
