UK Heading into ‘Zombie’ economy, industry experts call for new approach
A new paper jointly authored by risk consultancy business Wiserfunding and invoice insurance business Nimbla claims that ‘unsustainable debt’ is accelerating the growth of a credit bubble. They warn that the government’s current economic strategy will exacerbate the problem, and call for alternative measures to aid the UK’s recovery.
While SMEs’ agility makes them the north star for the UK’s economic recovery, the report says government aid invested in nonviable businesses could produce a debt bubble that prevents stronger businesses from regenerating.
The report also calls on the government to recognise this ‘overleveraging problem’ and avoid increasing the UK’s existing £35 billion of unsustainable debt. Instead, Wiserfunding and Nimbla suggest pivoting towards commercial credit debt.
Commercial credit is a healthier alternative to additional government loans, the report argues, because it could act as a form of economic stimulus. Companies would be better able to pivot if they insured the repayment of trade credit debts.
They report that trade credit insurance would also help to insulate supply chains against insolvency contagion. Companies are twice as likely to become insolvent as they were in 2019, according to Wiserfunding research.
The report concludes that waiting passively for the end of the pandemic is ‘not a viable option’, and could hinder economic recovery unless government and industry work together on a strategy that encourages sustainable growth.
Gabriele Sabato, CEO of risk consultancy Wiserfunding said: “Several studies show that a credit bubble was already forming before the start of the Covid-19 pandemic. The government support schemes have contributed to significantly accelerate the growth of this bubble worsening the credit profile of most SMEs which will find it even more difficult to access funding going forward.
The vast amount of debt injected in the economy has negatively affected the efficiency of the SME lending market by unbalancing the risk-reward trade-off and benefiting the less viable businesses most. Only when CBILS and BBILS will finally be dismissed, markets will be able to start regaining their efficiency, although it will undoubtedly take time.
While the government and regulators try to find a way to reduce the overleveraging problem of SMEs, alternative forms of debt, such as trade credit debt, will be needed to fund the recovery of SMEs and lead the UK economy out of the crisis” added Gabriele Sabato.
Flemming Bengtsen, Founder and CEO of invoice insurance firm Nimbla added: “The much needed injection of cash into UK businesses via CBILS and BBILS has succeeded in staving off insolvency for many SMEs. However it has also created a wave of “zombie” companies that have little realistic chance of survival. Arcadia’s collapse highlights the danger of a domino effect as defaults on trade credit trigger others to fail.
SMEs are in a precarious position; heavily leveraged and unable to withstand further stress to their business. They require their suppliers to offer credit terms as they cannot borrow more and in equal measure, they cannot afford for their debts to go unpaid. The average amount of bad debt SMEs said would tip them into insolvency was £30k before Covid-19. That number is undoubtedly much lower now. Arcadia sadly is just the tip of the iceberg as many more defaults can be expected in 2021. The government Trade Credit Reinsurance Scheme is set to end 31st Dec 2020. We are calling for that to be extended.”