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Coping with the Covid loan repayment crisis with new forms of financing


2022 is proving to be a tough year for UK businesses. Although we have emerged from the clutches of the pandemic, thankfully leaving Covid restrictions behind, the business world now faces a whole new set of challenges.

Inflation has become the word of the day and is set to potentially reach staggering levels
15% by the end of the year. The impact of soaring prices should be particularly felt by small and medium-sized enterprises which, unlike large companies, often lack the financial margin to absorb the cost of price increases.

Amid this difficult economic climate, businesses are finding it increasingly difficult to repay their Covid loans. According to the Department of Business, Energy and Industrial Strategy,
one in twelve businesses defaulted on government-backed loans they took out during the pandemic, with an estimate
£421 million yet to be repaid. The burden of Covid loan repayments isn’t going anywhere anytime soon, now is the time to look at exactly why so many businesses are struggling to make repayments – and how new forms of financing can help tackle this problem.

cash is king

Throughout the pandemic, government support has kept small businesses afloat. Temporary measures such as the furlough scheme and CBILS have essentially put the economy on life support, allowing businesses to weather the worst of the storm.

This very support has created a huge pile of debt that small businesses no longer have the financial capacity to repay. So why are so many SMEs struggling to repay this debt?

There is no doubt that the cost of living crisis is a major factor, with the number of companies reporting financial difficulties reaching almost
20% higher compared to the same time last year.

However, while inflationary pressures are undoubtedly making it more difficult for companies to repay their Covid debt, many of the reasons for companies’ inability to repay their Covid loans predate the onset of the cost of living crisis. . After all, in October 2021, a third of small businesses feared they would not be able to repay their Covid loans.

Chief among them is the thorny and ever-growing issue of securing sustainable working capital for SMEs. Payment delays are one exacerbating factor and the availability of capital is another.

According to small business federation, 61% of small businesses were affected by unpaid invoices in the first quarter of this year, with a quarter saying the propensity for late payments is on the rise. Liquidity problems are compounded by the difficulty of accessing finance itself, with bank lending to small businesses also at an “all-time high”. As a result, SMEs are literally strapped for cash. No wonder, then, that they are finding it increasingly difficult to repay their Covid loans.

Turn to new forms of financing

Fortunately, advances in financial technology are focusing on business data from companies. That means there’s no reason businesses should wait so long to get paid or struggle to access cash.

Machine learning can analyze past payment patterns to make probabilistic assessments of the few invoices that are unlikely to be paid, allowing the rest to be paid automatically by the buyer when received.

This technology can also advance cash from expected future earnings by leveraging data from multiple sources, including e-invoicing platforms and accounting systems. When strong and consistent cash flows are identified, SMEs can obtain larger loans which are then repaid as a percentage of their revenue.

This data-driven approach allows SMEs to receive the working capital they would otherwise struggle to access, providing them with the cash flow they need to meet liquidity challenges such as Covid loans.

We cannot allow the Covid loan repayment crisis to just bubble up in the background. To do so would be to kick the box, committing small businesses to further financial difficulties in the future. The cost of living crisis has certainly exacerbated the challenge of repaying Covid loans, but the scale of the problem demands an inspection that goes beyond the inflationary push.

If the crux of the problem is that SMEs have long been short of cash to repay their Covid loans, we need to look for new and innovative ways to provide small businesses with working capital. This means moving away from traditional forms of financing and leveraging technology to solve long-standing cash flow issues that businesses face. Helping businesses adopt this technology will be crucial in dealing with the Covid loan repayment crisis.