The Federation of Small Businesses is calling on the government to help struggling companies by giving them the opportunity to convert state-backed loans into employee ownership trusts.
A new study, published by the Federation of Small Businesses (FSB) and Ownership at Work, has proposed that struggling companies that have taken out government-backed loans during the pandemic should be given the chance to convert their debt into employee ownership trusts (EOTs).
The call comes as the Office for Budget Responsibility warns that 40% of Bounce Back borrowers could default.
The FSB/Ownership at Work report, A Shares for Debt Recovery Plan, concludes that giving businesses the option to convert emergency bounce back loans into employee equity stakes will "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".
It proposes that struggling small companies are given a time-limited amnesty under which Bounce Back Loans would be written off in exchange for all-employee equity stakes vested in employee ownership trusts. The private lenders providing the Bounce Back facilities would claim their 100% government guarantees in these instances.
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, the FSB warned of an impending small business credit crunch as the share of its membership with debt describing their borrowing as "unmanageable" rose 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."
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."
Written by Rachel Miller.