Covid loan schemes were a lifeline for small businesses, providing billions in payments, but five years later, there are firms that are struggling to pay back what they borrowed. Why are these companies in this position and what can they do?

While the economic legacy of Covid-19 is fading from view for some, for others it remains a daily challenge. This is the case for the many small firms that are finding it difficult to manage cash flow thanks to the burden of covid loan repayments.

There were three covid loan schemes. Alongside the best-known one, the Bounce Back Loan Scheme, which was aimed at specially at small businesses, there was the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme.

Why are firms struggling to make covid loan repayments?

The repayment issues that are dogging small businesses today are predominantly related to the Coronavirus Business Interruption Loan Scheme, which was made available to firms with turnover between £5 million and £45 million. Notably, while the Bounce Back Loan Scheme offered built-in flexibility in relation to repayment, the Coronavirus Business Interruption Loan Scheme did not. As such, the increase in interest rates has had a significant impact on repayment payments under this scheme.

The burden of higher repayments has been compounded by the cost of living crisis and the general economic slump that have followed the pandemic. For many firms, pre-pandemic revenue levels have not returned while costs have risen markedly – this is why cash flow is under so much pressure.

Managing loan repayments and how alternative lenders can help

While the government has acted to ease repayment terms for covid loan schemes, many small firms remain hamstrung by their repayments, with this outlay putting acute pressure on cash flow and affecting their ability to invest in growth.

What can firms with these debts, or others, do to reduce the pressure on cash flow? Alternative finance can help.

Services such as invoice finance, asset finance and peer-to-peer lending are proving a vital source of capital for small businesses in the current funding climate (with 65% more SMEs experiencing difficulty in accessing finance from high-street banks).

These alternative finance facilities, which offer a more easily accessible, affordable and personalised approach to lending, are helping small businesses survive and target recovery, stability and growth. In particular, invoice finance is allowing firms to secure capital without putting key business relationships at risk. As much as 90% of an approved invoice can be advanced by a finance provider, with the remainder settled by the client.

This profile has helped cement the reputation of alternative finance in the business sector. According to the British Business Bank, it is alternative lenders that are increasing filling the small business funding gap, with asset finance alone rising by 7% to £23.5 billion in 2023. At the same time, a 2024 study shows that more and more SMEs are turning to alternative lenders to access larger-scale finance packages.

Small firm finance options for managing Covid loan debt

For all the talk of green shoots of recovery, there are many small businesses still struggling to make ends meet thanks to the burden of covid loan repayments and the crises that have hiked costs and affected spending power in the years since the pandemic.

If these firms are to avoid collapse and safeguard cash flow so that they can fully recover and help achieve sustained economic growth, it is important that they can access finance. With traditional lenders cooling their interest in small business finance, it is vital that owners and directors are aware of all the options available, including the services of alternative lenders.

To find out more about A&T Business Associates services, contact Tony Hedger on 01903 602211 or tony.hedger@atbusinessassociates.co.uk.