EOTs “last resort” for businesses at risk of defaulting on bounce back loans

Converting Bounce Back Loans (BBLs) debt into employee ownership trusts (EOTs) should only be a “point of last resort” for businesses, a London-based accountancy partner warned.

Policy proposals put forward by the Federation of Small Businesses’ (FSB) on Monday, calling on the government to help debtor companies swap their BBLs for EOTs as a way to further alleviate pandemic-led business constraints, could carry some critical implications further down the line, said Simon Michaels, partner at HW Fisher.

“I would only be advising clients to consider this option if all other avenues had been exhausted” he said. “We would be looking at the consequences of implementing such a scheme.”

“When an owner is forced to give up part of its ownership, it will certainly come from a point of last resort. [The FSB report] talks about a ‘all-employee’ equity stake: Are all employees suitable, do all employees want this, will there be a cost to the employee?”

Moreover, Michaels warned the dynamics of debt and equity are “very different” and “shareholders will have to be prepared to lose a proportion of their ownership”.

“As well as losing ownership, which has been suggested at 10%,” businesses should carefully assess the additional costs of implementing this scheme, including the loss of dividend income that could stem from it, Michaels said.

FSB urges EOT scheme would “protect livelihoods and spur productivity”

During the pandemic, companies borrowed £46.53bn under the BBL government-backed program, but with repayments deadlines looming closer, the number of small businesses labelling their pandemic-related debt as “unmanageable” jumped from 13 percent to 40 percent in December, according to a separate FSB report.

These figures would jibe with estimations drawn last year by the Office for Budget Responsibility, according to which about 40 percent of borrowers could default on their BBLs.

“We’re broadly going to have three categories of borrowers: those that can start making the repayments that are now kicking in, those that can start to repay but only with the help of Pay As You Grow, and those that simply won’t be in a position to start repaying this summer,” said Martin McTague, national vice chair at FSB.

The new FSB proposals would see private lenders providing the BBL facilities write off the loans and claim their 100 percent government guarantee.

This model would support long-term recovery of suffering businesses as well as “protect livelihoods and spur productivity,” said McTague.

“[EOT] is a route through which we can protect businesses that will recover long-term, and by extension jobs and growth, whilst also realising the benefits of increased adoption of employee ownership, particularly where productivity is concerned.”

EOTs, created under the Finance Act 2014, holds a long-term or permanent shareholding in a company on trust for the benefit of employees. The most common employee-owned business is John Lewis.

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