Interest rate and inflation “double whammy” could spell the end for indebted businesses, say Evelyn Partners and Clarke Willmott
Rising interest rates and continued high inflation are creating a “double whammy” that could trigger a wave of insolvencies among businesses that took out government loans during the Covid-19 pandemic, according to experts.
The UK Government backed billions of pounds worth of loans after the onset of coronavirus, through financial support programmes including the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS).
According to the latest Government figures, businesses have drawn a total of £77 billion in coronavirus loans as of 31st March 2023. More than 7.5 per cent of these facilities are either in arrears or have defaulted – equating to over £3.5 billion.
While businesses were required to undergo due diligence in order to receive money through the CBILS scheme, BBLS – which provided loans of up to £50,000 interest-free for the first 12 months, with borrowers self-certifying their position – has been dogged by allegations of fraud. The government figures show that £1.18 billion in loans to businesses have been flagged by lenders as suspected fraud.
And leading professional firms Evelyn Partners and Clarke Willmott have warned that many businesses currently struggling to meet their COVID loan repayments face going out of business altogether against a backdrop of rising interest rates, high inflation, and increasing staff and energy costs.
Peter Brewer, partner and banking litigation specialist in the commercial litigation team at Clarke Willmott LLP, said he was aware of increasing numbers of firms struggling to repay loans taken out at the height of the pandemic.
He said: “The chickens are coming home to roost and this could spell the end of many ‘zombie businesses’ – those that only have sufficient funds to service the interest on their loans, but not the debt itself.
“Some businesses are struggling through no fault of their own, operating in markets where staff costs, energy costs, inflation and interest rates all have an impact and where they can only pass on a small part of the extra costs to their customers.”
Claire Burden, partner and head of the advisory consulting team at Evelyn Partners, added: “We are seeing plenty of businesses that have been on payment plans for PAYE and VAT arrears post-COVID which are now struggling to stick to them. HMRC is becoming increasingly active in terms of recovering the loans and it is reluctant to extend or re-negotiate terms.”
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