Small firms want support loans converted into employee shares

A report from the Federation of Small Businesses (FSB) and think-tank Ownership at Work suggests small firms that took out state-backed loans amid the pandemic should be allowed to convert the loan into shares for employees and write off the debt.

The research figures show that around 1.5 million loans worth a combined £46.5 billion were approved under the Bounce Back Loans Scheme, with the Office for Budget Responsibility warning that up to 40% of borrowers could default.

The FSB and Ownership at Work have launched ‘A Shares for Debt Recovery Plan’, outlining routes through which bounce back loans – 100% state underwritten facilities worth up to £50,000 launched at the start of last year’s lockdown – could be converted into EOTs in order to ensure the survival of viable businesses and help close the UK’s productivity gap.

The groups propose granting struggling small companies a time-limited amnesty under which bounce back loans would be written off in exchange for all-employee equity stakes vested in EOTs, a vehicle defined in Schedule 37 of the 2014 Finance Act. The private lenders providing the bounce back facilities would write off loans and claim their 100% government guarantees in these instances.

The option would initially be open to borrowers which are constituted as companies by limited shares but could be rolled out to other businesses at a later date.

The groups argue that providing this option to firms would have the dual effect of protecting viable businesses and jobs whilst spurring productivity. In 2018, the Employee Ownership Association highlighted the benefits of EOTs, especially where productivity is concerned, in ‘The Ownership Dividend’. UK output per hour worked stands at 16% below the G7 average.

Just under 90% of bounce back facilities have been provided via the UK’s biggest five banks, sparking fears that emergency loan initiatives have served to further entrench a lack of competition in the small business banking sector.

More than 1.5 million bounce back facilities have now been approved, with a collective value of more than £46.5 billion.

Over the winter, FSB warned of an impending “small business credit crunch” as the share of its membership with debt describing their borrowing as “unmanageable” soared from 13% to 40%.

FSB National Vice Chair Martin McTague said: ”When the bounce back loan scheme launched we thought we’d have the pandemic under control by Christmas. That’s not been the case, so there’s understandably going to be a lot of small companies struggling to make the bounce back loan repayments that are now kicking in.

“The Government could leave it to the banks to enforce collection, thereby risking the destruction of thousands of ultimately viable companies, increased unemployment as the furlough scheme winds down, and damage to local communities.”

“But we’re saying there is another way: give those who are cash-strapped the option to swap debt for employee equity. Doing so would protect livelihoods, spur productivity and pave the way for a small business-led recovery as we seek to emerge from the deepest recession in modern history.”

“The overwhelming majority of these loans have been provided by the big five banks. We’ve worked hard to promote competition in the small business banking sector in recent years. It’s vital that this doesn’t become a moment at which the fruits of those labours perish.”

Ownership at Work fellow and report author Nigel Mason said “In times of adversity businesses know they have to innovate. Replacing unaffordable debt with an employee ownership stake can protect smaller companies in a way that ultimately benefits everyone involved.”

“Business owners keep the doors open, super-charge employee motivation and have a new patient shareholder. Employees keep their jobs, can share in future profits and have a stronger voice in the business. Whilst Government accepts the loss of some smaller loan repayments, by protecting otherwise viable businesses it invests in boosting the economy and avoids the extra cost of lost tax revenues and impact on individual lives.”

“All-employee ownership is the UK’s fastest growing business model for good reason: it helps individuals, businesses and local economies and is precisely the kind of innovative solution Government should be backing to drive post-pandemic recovery.”