The government is preparing to address growing concerns over the economic fallout from a second wave of coronavirus infections by extending its emergency Covid-19 loan scheme for businesses.
Amid mounting speculation over the launch of fresh restrictions on business and social life as the number of cases climbs, the chancellor, Rishi Sunak, is expected to announce the extension of four state-backed lending programmes until the end of November.
In a development that would hand struggling firms further support into the autumn, sources with knowledge of the government’s plans said an announcement would be made as early as Tuesday. The move was first reported by the Financial Times, and comes as fears mount over Britain’s fragile economic recovery and the risks linked to a second wave.
Almost £53bn of government-backed loans have been awarded by commercial banks to businesses since March, with the Treasury guaranteeing 80% of the value of the loans. However, three of the programmes were to close to new applications at the end of this month, while the fourth, the “bounce back” scheme which gives banks 100% government backing, was due to expire at the start of November.
All four will be extended until the end of November, the sources said, while banks will be allowed to process loans until the end of the year.
Business leaders have been calling for an extension amid growing fears about a difficult winter ahead for the UK economy. Despite a strong bounce back in activity as lockdown measures were relaxed, the Bank of England expects the economy will not recover the ground lost until the end of next year at the earliest. Severe risks also remain from rising unemployment and the increase in Covid-19 cases.
Launched as Britain went into lockdown in March, the coronavirus business interruption loan scheme has been used by more than 60,000 firms, borrowing a total of £13.7bn, with loans of up to £5m. Commercial banks lend the money, but can recover up to 80% of the value of the loan from the government if the borrower subsequently defaults.
The large business version of the scheme has supported £3.5bn of lending and offers a similar guarantee but up to £200m. The majority of lending has been through the “bounce back” scheme, with more than 1.1m businesses borrowing more than £35bn in loans of up to £50,000.
The Treasury will also extend the future fund, which offers lending to fast-growing startups alongside matched-funding from private investors. Firms can borrow up to £5m using loans that are convertible into equity stakes. Almost 600 loans worth £588m have been approved so far.
The extension of the schemes comes amid concern that companies could struggle to repay their debts. The Office for Budget Responsibility, the government’s independent economic forecaster, has estimated that up to 40% of bounce back loans could default.
Earlier this month, the centre-right thinktank Onward, which has close links to the Treasury, said crippling levels of debt built up during the crisis would hamper the UK’s economic recovery because businesses would be reluctant to invest and hire workers when faced with massive debt repayments.
It said a debt-relief scheme should be used to allow firms to pay down gradually state-backed loans taken on during the crisis via a surcharge on profits and shareholder payouts. It would depend on a firm’s income levels, similar to the student loan system for tuition fees.
The shadow chancellor, Anneliese Dodds, said targeted government support was needed for companies struggling with debts. Speaking at Labour’s virtual autumn conference, she said: “From March next year, repayments will start for the loan schemes set up to help businesses through the crisis. But on the current trend, our economy won’t be anything like back to normal by then.
“Without effective government action, many companies will go to the wall - with more job losses and more costs for the public finances.”
The former chancellor George Osborne has also called on Sunak to write off the debts incurred by businesses through the government-backed schemes.
A spokeswoman for the Treasury said: “As we have repeatedly said we keep our package of economic support under constant review. We have already provided unprecedented support worth £160bn to businesses impacted throughout this period.”
“This includes government-backed loans, cutting VAT for the tourism and hospitality sectors, grants of £25,000 and the coronavirus job retention scheme, which has supported the wages of 9.6 million people so far.”