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Around one million SMEs have been overlooked in terms of COVID emergency support and are now in urgent need of help, with 20% receiving no financial support from the government since the onset of the pandemic, according to a new report from the Federation of Small Businesses (FSB).

Despite this, there has been a 12% increase in new businesses starting up during 2020, illustrating the entrepreneurial spirit amongst UK SMEs. However, without further support from the Government, the FSB expressed concern that the various challenges posed by the pandemic would consume the more unstable businesses.

Luke Davis (pictured above), chief executive officer of IW Capital, explained: “The SME community make up 99.9% of private sector businesses, and so supporting them to ensure their financial growth is of the utmost importance to the overall health of the UK economy. Small firms already employ over 16 million people in the UK, and pre-pandemic, this sector was growing at a faster rate than the overall job market. A return to this would provide a welcome boost.”

According to the FSB, the government should prioritize the availability of growth investment for SMEs looking to scale. The Federation stated that the last time that the government-backed Enterprise Investment Scheme (EIS) was extended, it resulted in a significant jump in private investment into small businesses. Replicating this effect with new incentives could provide a boost to a section of the economy that is most in need.

Davis added: "More practical support needs to be offered to small businesses, too many have been overlooked and we are now seeing the shortcomings of the government’s COVID relief strategy. In March, we need to see the EIS advanced to include the hospitality sector, which will help raise money into the businesses that need it. Hospitality used to qualify for investment under the Enterprise Investment Scheme, but unfortunately this was scrapped. If EIS is extended to hospitality, we would see a huge increase of investment and private equity into the sector, meaning businesses wouldn’t have to take on more debt to survive, giving them a much larger chance of success in the future.

Founded in 2010, IW Capital is a private equity house that aims to facilitate investment in growing SMEs across the UK. The firm focuses on originating, structuring, leading and managing investment opportunities for a network of high net-worth individuals, family offices, wealth manages and independent financial advisors.

50% of SMEs unable to repay bounce back loans

Alongside the FSB’s announcement, Funding Xchange – an alternative finance online referrals platform – has suggested that half of the 1.4 million bounce back loans made will not be repaid as less than 1 in 5 borrowers are forecast to have sufficient liquidity to make repayments from less than 50% of their free cashflow.

The company uses data collected from its platform and open banking functionality to forecast the capacity of businesses to be able to service their borrowings.

When the bounce back loan scheme was introduced, Funding Xchange’s data suggested that almost two thirds of borrowers would not have sufficient free cashflow to repay their loans within the six-year repayment period. Following the chancellor’s announcement that the repayment period has been extended to 10 years, the figure has been reduced to around half of borrowers.

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Katrin Herrling (pictured above), co-founder and chief executive officer of Funding Xchange, commented: “Extending the repayment period from six to 10 years will have a positive impact on around 20% of the businesses. We still forecast that more than half of the businesses who have used the scheme may be unable to repay. Many are already distressed and the 46% of borrowers who had no prospect of being able to repay anyway will still not be able to repay.

“The recent Competition and Markets Authority ruling against Clydesdale Bank stating that banks offering bounce back loans may not insist on businesses running their current accounts with them means that banks will not be able to see who can and cannot afford to repay. This leaves them in the difficult position of not knowing what pay-as-you-go (PAYG) capacity businesses who have borrowed from them will actually have.

“We are working with lenders to deliver open banking-driven solutions to establish PAYG capacity of businesses, but at the moment the data we have points to up to two-thirds of businesses with bounce back loans experiencing repayment stress. Several other nations are implementing debt forgiveness schemes for distressed businesses – we encourage the government to carefully examine these alternative solutions that might offer better value to taxpayers, businesses and banks.”

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