Action must be taken to tackle the burden of debt on small and medium-sized businesses to avoid a protracted economic recovery, says the Institute of Directors (IoD).
The institute has called on the government and banks to help tackle the “debt mountain” otherwise the UK faces an even slower path to economic recovery.
In a poll of 720 company directors, just over half said the debt their business had taken on during the current crisis would have a negative impact on their recovery. Additionally, 57 per cent of those polled by the IoD said it would hold back investment plans over the next two years.
Banks have recently warned that up to half of the government’s “bounce back loans” provided to the UK’s SMEs are unlikely to be repaid. Senior bankers estimated between 40 and 50 per cent of the bounce back borrowers could default on the debt, according to a report by the Financial Times.
The IoD has therefore proposed small companies should be able to convert the government-backed loans into “student loans”. Repayments would only start once companies have turned a profit and would repay a percentage of what they earn over a certain time period.
Of those surveyed, four out of ten said a student loans-type model would be favourable, compared to five per cent who favoured converting debt into equity held by a public body.
Director general, Jonathan Geldart, said: “Using a student loan style system for small companies could provide one way of lifting the burden from British business while still ensuring that those that can pay do.”
“A range of responses will be needed depending on the size and type of business. These figures emphasise that while government support has prevented even deeper damage, the work of rebuilding the economy is only just beginning.”
The IoD has also called for incentives allowing firms to reduce their tax liabilities as they invest, to spur investment in the short term.