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

Inflation has become the word of the day, and is forecast to potentially reach a staggering 15% by the end of the year. The impact of surging prices is set to be particularly hard-felt by small and medium-sized firms who, unlike large corporates, often lack the financial legroom to absorb the cost of price hikes. 

In the midst of this tough economic climate, businesses are finding it increasingly hard to repay their Covid loans. According to the Department of Business, Energy and Industrial Strategy, one in twelve businesses have defaulted on Government-backed loans they took out during the pandemic, with an estimated £421 million still yet to be repaid. With the burden of Covid loan repayments going nowhere anytime soon, now is the time to examine exactly why so many firms are struggling to make repayments - and how new forms of financing can help tackle this problem.

Cash is King

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

This very support has created a whopping pile of debt that small firms are now lacking the financial capacity to pay back. So, why are so many SMEs struggling to repay this debt?

There’s no doubt that the cost-of-living crisis is an important factor, with the number of firms reporting financial distress almost 20% higher compared to this time last year.

However, while inflationary pressures are no doubt making it more difficult for businesses to repay their Covid debt, many of the reasons for the inability of firms to repay their Covid loans pre-date the onset of the cost-of-living crisis. Afterall, in October 2021, a third of small businesses were worried that they would not be able to repay their Covid loans.

Principal amongst these is the thorny and ever-growing issue of securing sustainable working capital for SMEs. Payment timeframes is one exacerbating factor and the availability of capital is another.

According to the Federation of Small Businesses, 61% of small businesses were impacted by overdue invoices over the first quarter of this year, with a quarter saying that the propensity for late payment is growing. Liquidity challenges are compounded by difficulty accessing finance itself, with bank lending to small firms also at a “record low”. As a result, SMEs are quite literally strapped for cash. No wonder, then, that they are finding it increasingly difficult to repay their Covid loans.

Turning to new forms of financing 

Fortunately, advances in financial technology have a focus on business trading data. This means that there is no reason why businesses should have to wait so long to get paid or struggle to access cash.

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

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

This data-driven approach enables SMEs to receive the working capital that they would otherwise face difficulty accessing, providing them with the cash flow they need to tackle liquidity challenges such as Covid loans.

We cannot allow the Covid loan repayment crisis to simply bubble away in the background. To do so would be to kick the can down the road, committing small businesses to further financial difficulties in the future. The cost-of-living crisis has certainly exacerbated the challenge of paying back Covid loans, but the scale of the problem demands an inspection that goes beyond the inflationary surge. 

If the crux of the problem is that SMEs have long been lacking the cash to repay their Covid loans, we need to look at new and innovative ways to provide small businesses with working capital. This means moving away from traditional forms of financing, and instead leveraging technology to tackle the long-standing cash flow issues that businesses face. Supporting companies to adopt this technology will be crucial towards tackling the Covid loan repayments crisis.