In the shadow of the coronavirus pandemic, the UK’s small businesses face an uncertain future and the government has done little to help them.
Small and medium size businesses form the backbone of the UK economy. But they’ve historically struggled to secure financial support for expansion.
The UK has around 5.9 million private sector businesses. Of these, 5.82 million are small businesses (0-49 employees). They employ 13.2 million people and generate a turnover of £1.5 trillion.
Including medium size businesses takes the total to 5.86m SMEs (0-250 employees), employing 16.6 million people, or 60% of total UK employment. They have a combined turnover of £2.2 trillion – 52% of the gross domestic product.
Yet there is an estimated £22bn funding gap in terms of the finance they need. Almost half of all SMEs don’t plan to use external finance, citing the hassle or time associated with applying. Of those that have approached their bank, two fifths have been rejected. There is no statutory requirement for banks to lend any proportion of their loans to SMEs.
The coronavirus pandemic has posed new challenges. An estimated 20% of small businesses don’t have large enough premises and would struggle to cope with the social distancing rules. Some 10% of small businesses are reported to have lost all of their business as a direct result of the lockdown.
Banks estimate that nearly half of all small businesses will be unable to repay the Bounce Back Loans underwritten by the government. These loans are on top of the earlier financial commitments, often underwritten by personal securities and guarantees. Low cash flows endanger all repayments, and some experts believe that nearly a fifth of all SMES may struggle to survive.
End of the queue
In recent times BrightHouse, Oasis and Warehouse, Cath Kidston, Carluccio’s, Carphone Warehouse and Monsoon Accessorize have collapsed. As the economy emerges from the coronavirus lockdown, many more large businesses are likely to collapse. SMEs are usually big losers from the collapse of their big customers.
Under the UK insolvency laws, secured creditors, usually banks, hedge funds and private equity must be paid first. Unsecured creditors, which include SMEs, are near the end of the queue and receive little from the proceeds of the sale of the assets of their bankrupt customers. Here are some examples.
Monarch Airlines had unsecured creditors of £466m and secured creditors of £164m. After paying secured creditors, unsecured creditors are likely to recover around £600,000.
The liquidation of BHS is not yet finalised. Its unsecured creditors have received £36m payout against £1bn of debts.
Austin Reed, fashion retailer, had unsecured creditors of around £30m and are likely to recover 2p in the pound. Its bankers Wells Fargo will recover its debts of £7.24m in full.
Agent Provocateur went into administration, with an immediate “pre-pack” sale of the business and assets to a buyer backed by Mike Ashley. Secured creditor Barclays will receive the full £27.4m. Unsecured creditors were owed £29.7m are likely receive just £1.2m, or around 4p in the pound.
Flybe entered administration in March 2020 owing £317m to its unsecured creditors. They could recover just £600,000.
Fashion brand Jaeger collapsed and owed £82.7m to creditors. Around £49m is owed to unsecured creditors. They are likely to receive just 2p on the pound.
Carillion collapsed with liabilities of some £6.9bn. Most of the proceeds from the sale of assets are likely to be used to pay secured creditors. Some 30,000 supply chain creditors, which includes plumbers, electricians, drivers and small service companies are likely to receive little.
The above pattern is repeated endlessly, and many SMEs are strangled. There is no logical reason for permitting secured creditors to walk away with almost all of the proceeds of liquidation and leaving SMEs and other creditors to bear the bulk of the insolvency risk. An equitable sharing of the insolvent risk can enable thousands of SMEs to survive.
The obvious way to help SMEs is by ensuing that a proportion of the proceeds from the sale of bankrupt business’s assets are ring-fenced for distribution of unsecured creditors. The Corporate Insolvency and Governance Bill is currently going through parliament. In the House of Commons and the House of Lords,
Labour proposed that 30% of the proceeds be ring-fenced for distribution to unsecured creditors. This would enable SMEs to survive. This is desirable from a risk management perspective as well. Many SMEs are reliant upon comparatively few customers and are hit hard by their collapse. In contrast, banks, private equity and hedge funds hold diversified portfolios and have a capacity to absorb risks.
The government, with a huge majority in parliament, was not moved and refused to change status-quo. This appeased the finance industry but has left SMEs facing a bleak future.
Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor to LFF and tweets here.