£68bn in government-backed loans (BBLs and CBILs) have been disbursed to over 1.6m SMEs during the pandemic. These loans now account for over a quarter of all lending to SMEs.
Although they provided an essential lifeline to keep businesses going, the contribution of these loans to corporate indebtedness now creates a risk to economic recovery. Money spent on interest and repayments is money not spent on investment and (re)hiring. Bluntly, the economic shock of COVID-19 risks turning into a balance sheet recession.
A recent survey of company directors by the IoD found that more than half believed the debt they had taken on during the pandemic would constrain their recovery; and 57% said it would hold back their investment plans.
There have been calls to address the risk by simply writing off this debt. This deserves serious consideration: the stronger recovery that would likely ensue might well offset the fiscal impact. But a more sophisticated approach that attached conditionality to debt write-off could transform the risk into an opportunity. Businesses could be rewarded with full or partial write-offs in exchange for improving their environmental performance, for instance; for adopting best-practice corporate governance; or by taking steps to improve their productivity.