Avoiding Economic Meltdown In a National Emergency?

It took less than a week following the Chancellor’s Budget the package to feel woefully insubstantial given COVID-19 developments and the impact on the economy, businesses and jobs. As expected, he was on his feet again this week with a much bigger suite of measures aimed at supporting businesses with costs and cashflow.

“Whatever it takes”

The new measures were a combination of government-backed loans support, with initial commitments of £330 billion, grants and further tax cuts for businesses, amounting to a further £20 billion. In the face of current advice for consumers to avoid social contact in bars and restaurants, mass gatherings cancelled and schools closed, the cost of lost demand for businesses of all sizes is mounting up.

In what is essentially just step 2 for the government in supporting businesses through this period, the Coronavirus Business Interruption Loan Scheme, through which businesses can borrow up to £5 million with government covering the first six months of interest payments, is targeted on helping firms manage cashflow.

In addition, some help with other fixed costs was boosted with a 12 months business rate holiday and £25,000 grant for retail, hospitality and leisure businesses, and an increase in direct grants for small firms to £10,000.

There were also some steps to relieve pressure on households, with agreements from mortgage lenders to provide payment holidays of up to three months for those affected directly by the COVID-19 virus.

The statement also felt like an attempt to offer confidence that more government action was forthcoming as the situation develops. One clear and significant omission this week though was action to support wages and renters. The Chancellor indicated that this was under development rather than overlooked. The repeated assertions that government would do whatever it takes to ensure that businesses survive and are in a position to come back into action when risks subside were, no doubt, attempts to engender some confidence across the private sector.

But what is ‘whatever it takes’?

There is absolutely no doubt that more action will indeed be needed. The priority will be avoiding mass layoffs and ensuring households don’t face serious financial difficulties.

The release of the SME Finance Monitor this week also provides a really helpful baseline of SME lending activity. But it also reinforces the points we made earlier in the week that some fairly substantial efforts will likely be needed to ensure companies access the measures that are being implemented.

The SME Finance Monitor  shows that SMEs have been building up cash reserves for a rainy day, with the proportion of businesses (with employees) with more than £10,000 in credit balances steadily increasing since 2014. The survey suggests that SMEs hold, on average, the equivalent of a quarter of their turnover in credit balances – so, a three-month buffer essentially.

Also, on the positive side, SMEs report fairly high levels of trust in their bank, if not the industry as a whole. Elsewhere, reported discouragement has been declining too. Less positive, is the still subdued appetite to borrow. The proportion of SME happy to borrow to grow has been drifting down over time. The question is whether they will be happy to take on government-backed loans to survive as their revenues plunge?

The role of good business advice is going to be critical now – getting it in the first place and it being clear and appropriate. Banks will have a role in trying to minimise, where possible, any complexity in the application process. Additionally, support organisations will need to help businesses understand what they need and to signpost the right pathways to funding.

We know from our research on business resilience that networks play an important support role for entrepreneurs facing adversity. These will be disrupted as meetings and travel are restricted, so access to good on-line resources and virtual networks will need to quickly fill the gap. And extra efforts will be needed to engage with under-represented entrepreneurs and those in low income areas.