• Fresh Federation of Small Businesses (FSB) and Ownership at Work (OAW) study recommends offering struggling companies option to convert state-backed loans into employee ownership trusts (EOTs) to protect livelihoods and spur productivity
  • Office for Budget Responsibility (OBR) warns 40% of bounce back borrowers could default
  • Report follows concerns that emergency lending could cement lack of competition in business banking market

Giving struggling companies the option to convert emergency bounce back loans into employee equity stakes will “protect livelihoods, spur productivity and pave the way for a small business-led recovery as we seek to emerge from the deepest recession in modern history,” according to industry leaders.

FSB and OAW are today launching ‘A Shares for Debt Recovery Plan’, outlining routes through which bounce back loans – 100% state underwritten facilities worth up to £50,000 launched at the start of last year’s lockdown – could be converted into EOTs in order to ensure the survival of viable businesses and help close the UK’s productivity gap.

The groups propose granting struggling small companies a time-limited amnesty under which bounce back loans would be written off in exchange for all-employee equity stakes vested in EOTs, a vehicle defined in Schedule 37 of the 2014 Finance Act. The private lenders providing the bounce back facilities would write off loans and claim their 100% government guarantees in these instances.   

The option would initially be open to borrowers which are constituted as companies by limited shares but could be rolled out to other businesses at a later date.

The groups argue that providing this option to firms would have the dual effect of protecting viable businesses and jobs whilst spurring productivity. In 2018, the Employee Ownership Association highlighted the benefits of EOTs, especially where productivity is concerned, in ‘The Ownership Dividend’. UK output per hour worked stands at 16% below the G7 average.         

Just under 90% of bounce back facilities have been provided via the UK’s biggest five banks, sparking fears that emergency loan initiatives have served to further entrench a lack of competition in the small business banking sector.

More than 1.5 million bounce back facilities have now been approved, with a collective value of more than £46.5 billion.

Over the winter, FSB warned of an impending “small business credit crunch” as the share of its membership with debt describing their borrowing as “unmanageable” soared from 13% to 40%.    

FSB National Vice Chair Martin McTague said: ”When the bounce back loan scheme launched we thought we’d have the pandemic under control by Christmas. That’s not been the case, so there’s understandably going to be a lot of small companies struggling to make the bounce back loan repayments that are now kicking in.

“The Government could leave it to the banks to enforce collection, thereby risking the destruction of thousands of ultimately viable companies, increased unemployment as the furlough scheme winds down, and damage to local communities.

“But we’re saying there is another way: give those who are cash-strapped the option to swap debt for employee equity. Doing so would protect livelihoods, spur productivity and pave the way for a small business-led recovery as we seek to emerge from the deepest recession in modern history.

“The overwhelming majority of these loans have been provided by the big five banks. We’ve worked hard to promote competition in the small business banking sector in recent years. It’s vital that this doesn’t become a moment at which the fruits of those labours perish.”

OAW fellow, RM2 Chief Executive and report author Nigel Mason said: “In times of adversity, we must look for opportunity. With great policies and share schemes already in place, it is about innovating to offer businesses the chance to be party of the UK’s recovery rather than lose jobs to pandemic debt.

“Employee ownership is associated with greater efficiency, faster growth and a motivated workforce. As we look to economic recovery, once again we see that offering an employee stake could be a fantastic mechanism to save existing jobs and be part of renewal by promoting growth and new jobs.

“The effect of individual SMEs failing altogether would see government not just shouldering the cost of the original loan, but also lost tax revenues from businesses and employees, who might then require additional support through the benefits system.”