Cash reserves unsustainably low at 600,000 companies
12 Feb 2021
More than half a million UK employers are at risk of collapse in the spring as cash reserves fall perilously low, finds IPPR
12 Feb 2021
Almost 600,000 UK employers are at risk of business collapse in the spring without an urgent extension of government support, according to new analysis by the IPPR think tank.
Between them they account for one third of business turnover and employ some nine million people, whose jobs could be lost if the cash crisis for firms of all sizes is not quickly addressed, IPPR warns.
Existing business support schemes are currently due to end in late March and April, including loan guarantees, the business rates holiday and furlough support. Most companies will soon be expected to begin repaying government-backed loans made during the pandemic, and to start paying backdated VAT bills for the past year.
IPPR is calling for rapid action by the Chancellor to save the businesses on which UK economic recovery will depend when the lockdown is gradually eased, by extending and enlarging business support now.
The number of firms with less than three months’ cash reserves, considered a danger point for a business, rose sharply over the four months to the end of January – from one in four to one in three - despite two new rounds of cash grants for firms compelled to close during lockdown.
Small businesses – those employing fewer than 50 people – are at greatest risk, with 40% now having less than three months' cash buffers.
Half of all companies involved in hospitality, food and other services are now dangerously low on cash, as are 40% of those in the arts, entertainment and recreation sector - with almost all sectors reporting significantly lower cash buffers than in the autumn.
In a short paper published by IPPR’s Centre for Economic Justice, the think tank calls on the Chancellor to take four key steps to prevent unnecessary business collapse and enable firms to pick up faster when the hoped-for economic recovery gets under way:
- remove the looming cliff-edge for existing support schemes, by extending them until the economy is fully open again;
- change the lump-sum system of grant support so it is more closely targeted to firms’ needs - such as making grants proportionate to a firm’s normal revenues, as in Germany;
- extend grant support beyond firms obliged by law to close, so that struggling businesses that supply them are also assisted; and
- offer cash injections to struggling but viable businesses, in return for shares in those firms – an equity stake - which could ultimately be held within a Citizens’ Wealth Fund and provide a long-term return on the investment.
Carsten Jung, IPPR’s senior economist, said: ‘This is a moment of great peril for more than half a million UK employers as their cash reserves run perilously low and their businesses hang on by a thread. More firms are already at risk than at any time during the pandemic began, and in the worst hit industries such as hospitality and the arts, at least two in five employers are in the cash danger zone.
‘In just a few weeks, UK businesses face a dangerous precipice when the many kinds of government support that have kept them going for a year are suddenly taken away. For the sake of the economic recovery, businesses should be given a boost. The time for action to save our economy is now.’
George Dibb, head of IPPR’s Centre for Economic Justice, said: ‘Millions of people’s jobs and livelihoods depend on the Chancellor stopping firms going broke just as the pandemic is coming under control, and ensuring that they have enough cash not just to limp through this crisis but to come roaring out of it when lockdown ends.
‘By extending and improving the current support schemes, and by taking the new route of injecting cash into firms in return for a long-term stake in their future, the government can ensure that our best businesses survive and can leap back into action as our economy recovers from this long hibernation.’