CBILS and BBLS have not only propped up failing businesses, they have induced a coma among viable businesses that would otherwise be adapting to the new market.

Zombie businesses are defined as those that ‘fail to generate enough revenue to make their interest payments on borrowings for three years running and have low valuations that suggest moribund prospects.’

The problem

Given the GDP fall, bankruptcies should have gone up 20-40% (The Economist, 2020). But insolvencies decreased by 34% in 2020 compared with 2019, due to the temporary amendments to insolvency legislation, and record levels of government loans.

Last year, CBILS and BBLS approved £53.47 billion in loans to 1.3 million SMEs, (around a quarter of those in the UK). Many businesses have exhausted their loan allowances, and when the schemes end in April, will be unable to repay their debts. The Department of Business, Energy and Industrial Strategy (BEIS) has estimates that 35% to 60% of borrowers will default on their loans in the next year.

And national debt is £2.1 trillion and rising. The Office for Budget Responsibility forecast a budget deficit of £394 billion this year. It now looks as though we will be facing a deficit of around £100 billion a year for several years to come.

The Government loan schemes are a short term solution. Loans have rarely been targeted at the most viable firms, creating a zombie economy that’s geared toward hibernation. Instead, businesses need to adapt to the new realities of trading post Brexit.

By failing to adapt, Zombie SMEs increase market uncertainty and information asymmetry, compounding the overleveraging problem. The assets of non-viable businesses will not be recycled, leading to a stagnant and risk-averse market that is disadvantageous for recovery.

A way forward

A study published by a group of around 200 financial experts and overseen by EY estimated that the UK is facing around £35 billion in unsustainable debt. They proposed three solutions to this problem:

1. Transform smaller debts into tax obligations.
2. Converts debts over £1 million into preference shares or long-term subordinate debt, and provide fixed dividends to shareholders.
3. Create Business Capital Growth Shares (BCGS) to help fund growth and rebuild cash reserves.

Through the BCGS, businesses could access capital dedicated to helping them grow and increasing their cash-flow. This would help to stimulate economic recovery.

An alternative to this solution could be focusing on commercial credit debt. Trade credit insurance would make it safe for businesses to resume trading on favourable credit terms. A greater reliance on commercial credit debt would help channel funds to viable businesses, and encourage them to trade out of the crisis.

The trade credit solution would resuscitate businesses by incentivising them to initiate growth and adaptation projects. SMEs could capitalise on their renowned agility to adapt their processes to the current situation and quickly increase their revenue.

How Nimbla can help

Nimbla makes trade credit insurance accessible for SMEs. Businesses can use our self-service portal to see the risk across their sales ledger, select which invoices they would like to insure, and protect them against default in just a few clicks.

With the confidence that Nimbla provides, businesses can extend new credit lines and trade more with existing customers. Instant and flexible protection against risk can help SMEs capitalise on their agility and pursue opportunities in new markets and geographies.

Invoice insurance is often mandatory for obtaining invoice finance, a more sustainable form of debt that SMEs can use to help fund new ventures. Over time, invoice insurance and invoice finance can help to ease the overleveraging problem by offering SMEs the security and capital they need to succeed in the new normal.

Click to read the full Whitepaper, ‘Restarting the Economy: How can we cure the overleveraging problem of UK SMEs?’