IoD survey: Business debt will slow recovery without action

Business debt will slow the economic recovery from coronavirus unless steps are taken to make the burden more manageable for small and mid-sized companies, the Institute of Directors said today [Wednesday].

In a Policy Voice poll of 720 company directors, half (51%) said that debt their organisation had taken on during the crisis would have a negative impact on their recovery, while even more (57%) said it would hold back their investment plans over the next two years. Less than a third said that debt they had built up would have no impact on either their recovery or medium-term spending plans.

The IoD said government, banks, and businesses would need to work together to deal with the ‘debt mountain’ firms face, to enable them to invest and heal the economy. The institute has proposed that small companies should be able to convert government-backed loans into ‘student loans’, with repayments kicking in once the business has turned a profit. Companies would pay a percentage of what they earn over a certain time period, in a manner similar to student loans. This could give small businesses more breathing space to invest and grow as they make repayments, while potentially lowering the risk of loan defaults.

Of those surveyed who had taken on debt, four out of ten said that restructuring into the student loan format would be best for their organisation, compared with only 5% who favoured converting the debt into equity held by a public body. The polling was conducted between 20 and 29 May.

To spur investment in the shorter term, the IoD is also calling for incentives allowing firms to reduce their tax liabilities as they invest, to help them quickly adjust to the ‘new normal’.

Jonathan Geldart, Director General of the Institute of Directors, said:

“During the crisis Government loans have been a lifejacket for business, but they could become an anchor dragging back the recovery. If we don’t deal with the debt mountain businesses have had to take on because of coronavirus, the economy will take much longer to heal.

“Understandably, debt can weigh heavily on the minds of business leaders. Many directors will want to pay the bills before they start spending on new projects. Even after we emerge from lockdown, investment may be held back, limiting the scope for companies to innovate and expand.

“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.”