JEss Christman, who runs a Scottish timber business, recalls banks “throwing money at him” during the Covid-19 pandemic as then chancellor Rishi Sunak tried to help small companies stave off collapse.
Christman, who runs Black Isle Firewood near Inverness, which produces firewood and timber and lodges for the tourist market, ended up taking out a government-backed loan under the Coronavirus Business Interruption Loans (CBILS) scheme.
However, he had difficulty repaying the money as the economy remained “in the doldrums” until his lender, Close Brothers, allowed him to extend the term of his loan from five to nine years.
“CBILs have been a lifeline. Without them, I would have to close the business,” he said of the company he founded in 2010 after leaving his previous job at a housing association.
“Before Covid, the business was doing well. But things haven’t improved since then. It was pretty quiet because the economy was not doing well and people were sitting on their hands. My lender was willing to extend, so I was lucky. I know people who have gone bankrupt as a result of CBIL,” he added.
The CBILs were one of three major packages of £77bn of government-backed pandemic loans disbursed under emergency conditions to pump money into small firms and stave off economic collapse. Loans from banks and other financial institutions were managed by the state-owned British Business Bank (BBB) and the lenders decided on applications.
Four years after the pandemic, many smaller businesses are struggling to repay those loans because of the economic downturn and higher inflation, which has reduced sales and increased the cost of wages and utility bills.
The Federation of Small Businesses (FSB), the trade body that represents small businesses, believes that those who have taken out CBILs should be given more flexibility to repay them, with higher debts holding back investment.
The most famous program was the reverse loan program, which was launched in May 2020 to support the life of small businesses during the lockdown. It offered fully government guaranteed bank loans of up to £50,000 or 25% of turnover. Paperwork was minimal; applications were self-certified and there were no credit checks.
A quarter of all businesses took advantage of the scheme, but it has since proved controversial with an estimated £1.8 billion in loans flagged as suspected fraud. UK companies have raised £46.59 billion through the recovery scheme, with 74% of loans by volume fully repaid or on track to be repaid.
But lenders resorted to the government’s repayment guarantee for around 18% of all repaid loans by volume – worth about £9bn by December 2023 – mainly as businesses failed.
CBILs were offered up to £5m for businesses with a turnover of less than £45m and the loans were 80% backed by the government. Companies have drawn £25.84 billion, with 91% of CBILs by volume currently redeemed or on track to redeem. The government guarantee has so far been invoked on 5.35% of the CBIL volume.
A third scheme, the Coronavirus Major Business Interruption Scheme (CLBILS), targeted companies with an annual turnover of more than £45m.
Businesses struggling to pay back their loans can access a ‘pay-as-you-grow’ scheme, which provides flexibility including repayments or extending credit terms of up to 10 years. Around 34% of businesses with repaid loans have taken advantage of the option to repay according to growth.
However, no such formal scheme is available for CBIL businesses – any extension of the loan is purely at the discretion of the bank.
Martin McTague, national chairman of the FSB, said: “While CBILS was a vital part of the initial support that was put in place to help businesses stay afloat during the pandemic, we warned at the time that the lack of flexibility around repayment terms would cause problems in the future.
“We asked that CBILS loans be offered in the same form that loan applicants were receiving. Some CBILS loans had a variable interest rate and then the interest rates skyrocketed much higher than those who took out the CBILS loan at the time could have predicted.
“These higher repayment costs for thousands of small businesses come at a time of higher energy bills, rising tax burdens and increased labor costs.”
Kate Nicholls, chief executive of trade body UKHospitality, said: “One of the many barriers to growth for the hospitality sector post-pandemic has been the repayment of Covid-related loans, with high interest rates pushing up payments and making it extremely challenging. for many businesses to thrive in a challenging economic climate.
“These are additional costs that limit investment in the sector and we continue to call on the government to allow these loans to be refinanced to allow for longer repayment periods and without penalty. This would offer affected businesses the support they need to survive in the medium to long term, as well as free up capital for further investment in the hospitality industry, providing a much-needed boost to the wider UK economy.”
John Donald, 73, whose Edinburgh-based business Robop took out a £160,000 CBILS loan in 2020, has struggled to repay £3,000 a month from 2021 while his business is still slowly recovering.
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Donald co-founded a company that delivers a patented autonomous robot that looks like a peregrine falcon and deters birds from nesting on buildings. Customers include Network Rail and Caterpillar.
“We set up the business the day after 9/11 and have been through economic turmoil before including the financial crisis in 2008 and the Brexit vote in 2016 when we saw our UK orders fall. But until the pandemic, we were growing 330% a year,” Donald said.
“We assumed that recovery from the pandemic would take six months. Once the repayments started and the money wasn’t coming in, we really struggled and wanted to extend the terms, but that didn’t happen.”
Finally, administrators were appointed and the company went into insolvency in 2022. Donald bought back some of the assets and started a new company, Robop Systems Engineering.
Some firms are still struggling to repay their repaid loans, despite firms having access to more lenient repayment schemes. The Money Advice Trust, the charity which runs the Business Debtline, which helps businesses in difficulty, said 35% of its clients have repaid credit debt, with an average debt of £25,434.
Jane Tully, director of external affairs and partnerships at the Money Advice Trust, said: “The financial impact of Covid is still affecting many small businesses, a situation that has been made worse by the high cost of living. Our advisers at Business Debtline are hearing from people who are now struggling to repay loans, including reverse loans they took out during the pandemic.”
Dave Hughes, 62, who runs Hotbox, a not-for-profit music venue in Chelmsford, said he had struggled to repay a £50,000 reverse loan partly because other costs, including rent, had risen.
He set up the campus seven years ago after a career in business while his son was studying music at university. “I always wanted to have a music venue,” he said. “But the last two years have been tough. During Covid we were closed for most of the two years… Then inflation hit and the cost of electricity went up and people were spending less as well.
“Before Covid I was completely debt free. We got into debt through no fault of our own.”
British Business Bank said: “Where CBILS borrowers are struggling, lenders can in many cases extend the original loan terms to a maximum of 10 years if they need help reducing their monthly repayments. We strongly encourage those who need this extra help to speak to their lender.”
The UK government said: “We have revised the lending rules to give lenders the option to extend the repayment period from six to a maximum of 10 years to help borrowers who need financial help to reduce their monthly payments and repay their loan.
“During the pandemic, we also covered interest payments for the first 12 months of loans for CBILS borrowers, helping thousands of businesses stay afloat.”
However, many believe that more measures are now needed. McTague said: “What was the point of supporting these businesses through the Covid disruption to the tune of billions of pounds if we are now going to allow them to go to the wall – with their debts unpaid? Helping them pay off their CBILS debts on a schedule that is manageable certainly makes a lot more sense for all parties.”