During the Covid-19 crisis, many businesses have taken on significant levels of debt to stay afloat – in part through government guaranteed lending schemes, as well as rent holidays and other commercial loans. High levels of corporate indebtedness are likely to prolong any economic downturn precipitated by the pandemic. It is therefore essential that viable businesses are not saddled with unmanageable levels of debt that would cripple the SME sector – vital to a healthy market economy – and endanger jobs and livelihoods.

There is a magnitude of debt being taken on by SMEs, much of it via Government lending schemes:

  • Unsustainable business debt is set to reach up to £70 billion: with as much as £23 billion stemming from government guaranteed lending schemes. SMEs are set to incur half of this debt.
  • 250,000 small businesses could fold over the next year: One third of SMEs have increased their levels of debt. They are carrying an additional £173,000 of debt to service annually. Four in ten of them say this is ‘unmanageable’.
  • There are significant regional disparities in access to equity finance: the majority of unsustainable debt is held in regions outside London, but these only account for a quarter of SME equity finance – with availability of equity finance heavily skewed towards London and the South East.

The scale of government-backed lending presents a rare opportunity to utilise debt-for-equity swaps that could develop a more social economy by transitioning at-risk, yet viable, private enterprises to employee or community ownership at scale. This proposal has three core aims:

  1. Reduce the unmanageable debt burden of SMEs that have been impacted by the pandemic, which is likely to weigh down the economy during the recovery.
  2. Protect local businesses and jobs and avoid the dislocation and economic damage experienced by local communities when significant employers go into administration or collapse.
  3. Facilitate the transition of private businesses toward more social business models that have the potential to transform employment by paying higher wages, increasing workforce solidarity and providing a richer set of benefits to employees.

A debt-for-equity fund on this scale could be a ground-breaking initiative that connects up social investment, enterprise lending CDFIs, impact investors and business infrastructure bodies. This is an opportune time to explore transformative interventions that tackle the Covid SME debt burden while creating a more inclusive and social economy.

SIB are launching a campaign bringing together communities, practitioners, investors and policymakers to look at this issue in greater depth and co-design ambitious solutions. If you are interested in taking part in this campaign or would like to find out more, please sign up using the form below.

 

Photo credit: Dan Burton on Unsplash

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