Companies who have taken on large levels of debt or require further funding run the risk of becoming zombie companies where all their profits are used to service debt, say leading tax and advisory firm, Blick Rothenberg
Richard Churchill, a parter at the firm said: “ This results in no growth, reinvestment or return to shareholders and ultimately will not serve to help repay the deficit created by Coronavirus.”
He added: “ The successor loan scheme must allow for both Government and Owners to share in the growth of a business so that owners are motivated and Government has a chance of receiving greater funds than advanced through the loan scheme.
“The simplest way to achieve this would be for part of the loans already advanced or new loans to be converted into equity in these businesses. The current network of CBILS loan providers have significant financial data on the borrowers and could be used to help administer the scheme.”
He added: “ The successor loan scheme must allow for both Government and Owners to share in the growth of a business in order so that owners are motivated and Government has a chance of receiving greater funds than advanced through the loan scheme.
Richard said: “ The Chancellor has bought himself a little more time to consider his options and the rules to ensure the scheme is fair to all and not open to abuse and the business community will look forward to hearing further details once released.
He added: “ The Chancellor has finally acted to address the main failings of the Bounce Back and CBILS loan schemes. Cashflow is critical for business survival and by extending the intial repayment holiday, providing flexibility over repayments and extending the repayment term of these loans to 10 years he has successfully and responsibly addressed the affordability issue.”
Richard said: “ Many businesses have been forced to change their business models and it is likely the events of recent weeks will force a further rethink. Accordingly access to funding is critical so that viable businesses to invest in their new plans and grow providing the much needed tax revenues the Chancellor requires to balance his books in the medium to long term.”
He added: “ However there must be an equitable balance between the lender, essentially the Government in this case, and business owners to ensure entrepreneurs remain motivated and engaged to generate growth.
“I am sure the successor loan scheme announced to come into effect on 1 January 2020 will look to address this balance. But winter is coming and we don’t want an army of zombie companies to follow.”